Bank of Uganda has raised its benchmark interest rate to 12% as weaker foreign exchange earnings, rising fuel costs and reduced capital inflows put pressure on the shilling and threaten higher inflation.
At a special meeting on October 14, the Monetary Policy Committee increased the Central Bank Rate by 225 basis points, or 2.25 percentage points, from 9.75%.
BoU said the escalation of the Middle East conflict had significantly worsened the global environment since its August meeting, widening Uganda’s current account deficit and increasing exchange rate volatility.
“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,” it said.
The current account deficit widened by $1.4 billion to $4.6 billion, reflecting lower agricultural commodity prices, particularly coffee and cocoa, reduced tourism receipts following temporary travel restrictions, and rising 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 charges, while the primary income deficit rose to $1.7 billion from $1.4 billion.
Higher remittances provided some relief, improving the secondary income surplus to $3.1 billion from $2.7 billion.
Global uncertainty and rising interest rates in advanced economies also made overseas investments more attractive than Ugandan financial assets, limiting capital inflows and weakening the shilling.
“The resulting depreciation, together with elevated international oil prices, has raised domestic fuel pump prices, further adding to inflationary pressures,” BoU said.
The Middle East conflict has disrupted shipping routes and energy infrastructure, raising oil prices, freight and insurance costs. Uncertainty in international financial markets has further increased imported inflation risks and currency pressures across emerging and frontier economies.
Economist Emmanuel Okware supported the direction of the policy change but criticised its timing, saying he had urged BoU in February to raise the rate by 50 basis points to 10.25%.
“I wrote that any increase would signal the right direction of policy,” Okware said.
He accused the bank of overlooking warning signs, describing its earlier decision to hold 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.
BoU’s October statement attributed the latest tightening to the deterioration in external conditions since August and the increased risk of inflation following sharp currency depreciation.
Headline inflation rose to 4.6% in September from 4.1% in August, driven by higher food crop prices and fuel costs as the weaker shilling began feeding into domestic prices.
Core inflation increased from 3% in May to 3.5% in August and 3.7% in September.
“This steady rise indicates that cost pressures are beginning to spread more broadly,” the bank said.
Annual average headline and core inflation stood at 3.4% and 3.3%, respectively, over the 12 months to September.
BoU said core inflation remaining below its medium term target of 5% reflected the continued effectiveness of monetary policy.
However, rising energy and food prices and depreciation pressures have prompted an upward revision of the outlook.
Core inflation is now projected to average between 5.5% and 6%, and headline inflation between 7% and 7.5%, over the next 12 months.
Risks remain tilted towards higher inflation, including escalating conflicts, increased energy, transport and input costs, renewed depreciation, adverse weather, stronger domestic demand and the spread of fuel and food costs into broader prices and expectations.
Favourable weather, weaker global or domestic demand and a sharper fall in international commodity prices could ease those pressures.
Economic activity remained resilient, although growth moderated. BoU projected growth of 6.4% in the quarter ending September, down from the 6.8% reported by the Uganda Bureau of Statistics for the quarter ending June.
Private sector activity continued expanding at a slower pace. Business confidence remained positive despite moderating in September, while consumer sentiment weakened marginally on less favourable economic expectations.
The bank cut its growth forecast for the 2026/27 financial year to between 6% and 6.5%, from between 7% and 7.5%, citing tighter global and domestic financial conditions, depreciation, geopolitical uncertainty and higher energy prices.
As these predominantly external pressures ease, growth is expected to strengthen to an average of about 8% over the medium term, supported by private investment, stronger exports, anticipated oil sector developments and the government’s Tenfold Growth Strategy.
Growth risks remain tilted downwards because of elevated energy and transport costs, prolonged geopolitical and trade disruptions, adverse weather and potentially tighter financial conditions.
Stronger investment, favourable weather and easing global tensions could improve the outlook.
Although core inflation remains below target, BoU warned that sharp depreciation could drive a rapid increase in prices, with considerable uncertainty surrounding global developments.
“The fuel shock seems persistent,” the bank said, warning that its combination with depreciation and El Nino weather could entrench inflation unless monetary policy contained the pressures early.
BoU had already raised the Cash Reserve Requirement to 13.5% from 11%, effective September 24, to prevent excess liquidity from becoming destabilising and strengthen monetary policy transmission.
However, persistent external pressures, depreciation risks and the prospect of higher inflation required further tightening.
The rate increase aims to contain inflation, prevent higher energy and currency costs from spreading through the economy, and keep inflation expectations around the medium term target.
Higher interest rates can support the shilling by making local financial assets more attractive and restraining borrowing and spending, although they can also increase financing costs for businesses and households.
The Central Bank Rate band remains at two percentage points above and below the benchmark.
The rediscount and bank rates remain three and four percentage points above it, respectively, placing them at 15% and 16%.
“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,” BoU said.
