The 225-basis-point increase follows a weaker shilling, higher fuel costs and a worsening external account position, while the central bank has cut its economic growth forecast for 2026/27.
The Bank of Uganda has raised its benchmark interest rate to 12 percent from 9.75 percent, tightening monetary policy as pressure on the shilling, higher fuel prices and worsening external balances increase the risk of faster inflation.
The Monetary Policy Committee (MPC) approved the 2.25-percentage-point increase at a special meeting on Wednesday, October 14, bringing borrowing conditions under tighter control as the central bank responds to deteriorating global economic conditions.
Governor Michael Atingi-Ego said the shilling’s depreciation could feed into domestic prices, making further action necessary even though inflation remains below the bank’s medium-term target of 5 percent.
Speaking to reporters by video link from Thailand, where he is attending the annual meetings of the International Monetary Fund and World Bank, Atingi-Ego warned that inflation could accelerate if rising costs were allowed to spread through the economy.
The policy meeting had initially been scheduled for November, but the bank brought forward its decision as external pressures intensified.
External pressures weaken the shilling
In its October monetary policy statement, the central bank said the escalation of conflict in the Middle East since its August meeting had worsened the global economic environment, disrupted trade and increased uncertainty in financial markets.
Higher oil prices, shipping costs and insurance charges have raised import costs, while tighter financial conditions in advanced economies have made foreign assets more attractive to investors than Ugandan financial instruments.
The resulting reduction in capital inflows has added to pressure on the shilling.
“These developments have adversely affected the current account deficit and increased exchange rate volatility, intensified depreciation pressures which could amplify inflation, necessitating a tight monetary policy stance,” the bank said.
Uganda’s current account deficit widened by $1.4 billion to $4.6 billion, according to the central bank, reflecting lower agricultural commodity prices, particularly coffee and cocoa, reduced tourism receipts following temporary travel restrictions and higher oil prices.
In the 12 months to August 2026, the goods deficit increased to $2.8 billion from $2.4 billion a year earlier. The services deficit widened to $3.3 billion from $2.2 billion, largely because of freight costs, while the primary income deficit rose to $1.7 billion from $1.4 billion.
Higher remittances partly offset the deterioration, with the secondary income surplus increasing to $3.1 billion from $2.7 billion.
The weaker shilling, combined with elevated international oil prices, has also pushed up domestic fuel pump prices, adding to the cost of transporting goods and providing services.
Inflation forecasts rise above target
Annual headline inflation rose to 4.6 percent in September from 4.1 percent in August, driven mainly by higher food crop prices and fuel costs.
Core inflation, which excludes certain volatile price movements, increased from 3 percent in May to 3.5 percent in August and 3.7 percent in September.
The central bank said the increase suggested that cost pressures were beginning to spread beyond individual items into the wider economy.
Average annual headline and core inflation stood at 3.4 percent and 3.3 percent, respectively, in the 12 months to September.
Despite the relatively moderate current readings, the bank has revised its outlook upwards. It now expects core inflation to average between 5.5 and 6 percent and headline inflation between 7 and 7.5 percent over the next 12 months, both above its medium-term target.
The bank warned that further currency depreciation, persistent energy costs, adverse weather and rising transport and production expenses could push prices higher.
“The fuel shock seems persistent,” the bank said, warning that the combination of fuel costs, exchange rate depreciation and the effects of El Niño weather could entrench inflation if monetary policy failed to contain the pressures early.
Favourable weather, weaker demand and a sharper fall in international commodity prices could ease inflationary pressures, the bank said.
Economist questions timing of intervention
Economist Emmanuel Okware supported the direction of the rate increase but criticised the timing, saying he had urged the central bank in February to raise the benchmark rate by 50 basis points to 10.25 percent.
“I wrote that any increase would signal the right direction of policy,” Okware said.
He accused the bank of overlooking warning signs and described its earlier decision to maintain the rate as “monetary policy mismanagement.”
“The only available tool is proper management of money supply. And that’s what the BoU has demonstrated in its late policy action,” he added.
The central bank said the latest decision was prompted by the deterioration in external conditions since August and the growing risk that currency depreciation and higher energy prices would feed into broader inflation.
The rate increase follows a separate decision to raise the Cash Reserve Requirement, the proportion of eligible deposits commercial banks must hold as reserves, from 11 percent to 13.5 percent, effective September 24.
The measure was intended to limit excess liquidity in the banking system and strengthen the transmission of monetary policy.
Following Wednesday’s decision, the rediscount rate rises to 15 percent and the bank rate to 16 percent, according to the central bank.
Growth outlook downgraded
The tightening comes as the central bank lowers its economic growth expectations for the 2026/27 financial year.
The bank now projects growth of between 6 and 6.5 percent, down from its previous forecast of 7 to 7.5 percent, citing tighter domestic and international financial conditions, exchange rate depreciation, geopolitical uncertainty and higher energy costs.
Economic activity remains resilient, but growth is moderating. The central bank projects growth of 6.4 percent in the quarter ending September, compared with the 6.8 percent reported by the Uganda Bureau of Statistics for the quarter ending June.
Private sector activity continued to expand at a slower pace. Business confidence remained positive despite easing in September, while consumer sentiment weakened slightly as households became less optimistic about economic conditions.
The bank expects growth to strengthen to an average of about 8 percent over the medium term, supported by private investment, stronger exports, anticipated developments in the oil sector and the government’s Tenfold Growth Strategy.
However, it warned that prolonged geopolitical tensions, higher energy and transport costs, adverse weather and tighter financial conditions could further weaken the outlook.
Higher interest rates can help contain inflation by restraining borrowing and spending while making domestic financial assets more attractive to investors. But they can also increase financing costs for businesses and households, potentially weighing on investment and consumption.
The central bank said it would continue monitoring domestic and global developments and remained prepared to take further action to preserve price and financial stability.
“The MPC will continue to assess domestic and global economic developments and stand ready to take additional measures, as warranted, to preserve price and financial stability,” it said.
