BoU raises Central Bank Rate to 12%

Bank of Uganda (BoU) has raised its benchmark interest rate from 9.75% to 12% in a bid to contain rising inflation, stabilise the Shilling and prevent price pressures from escalating.

The decision was made by the Monetary Policy Committee (MPC) at a special meeting on October 14, 2026, amid growing economic uncertainty linked to geopolitical tensions, rising international oil prices and pressure on the domestic currency.

The increase of 2.25 percentage points is expected to make borrowing more expensive for commercial banks and could translate into higher lending rates for businesses and individuals.

The central bank said the decision was necessary because worsening international economic conditions were putting pressure on Uganda’s external payments position 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,” the Bank of Uganda said.

The central bank said the escalating conflict in the Middle East had disrupted important shipping routes and energy infrastructure, pushing up international oil prices, transportation costs and insurance premiums.

At the same time, higher interest rates in advanced economies have encouraged investors to channel more funds into those markets, limiting capital flows to countries such as Uganda and putting additional pressure on the Shilling.

A weaker Shilling makes imported goods, fuel, machinery and other products more expensive, potentially increasing the cost of living and doing business.

“The resulting depreciation, together with elevated international oil prices, has raised domestic fuel pump prices, further adding to inflationary pressures,” BoU said.

The central bank warned that continued currency depreciation and rising global commodity prices could intensify inflationary pressures if left unchecked.

Bank of Uganda said the country’s current account deficit had widened by US$1.4 billion to US$4.6 billion, reflecting an increase in the gap between foreign currency earnings and payments to the rest of the world.

The deterioration was attributed to lower prices for some agricultural exports, particularly coffee and cocoa, reduced tourism earnings and higher import and transportation costs associated with rising oil prices and travel restrictions.

The goods trade deficit increased to US$2.8 billion in the 12 months to August 2026, up from US$2.4 billion in the corresponding period a year earlier.

The services deficit also widened from US$2.2 billion to US$3.3 billion, largely due to higher freight costs.

Meanwhile, the primary income deficit, which includes payments such as investment income to foreign investors, increased from US$1.4 billion to US$1.7 billion.

However, secondary income improved from US$2.7 billion to US$3.1 billion, supported by increased inflows such as remittances from Ugandans living abroad.

The central bank reported that inflation increased in September, with headline inflation rising from 4.1% in August to 4.6%, largely due to higher food and fuel prices.

Core inflation, which excludes certain volatile price components to provide a clearer picture of underlying inflation trends, also increased from 3.5% to 3.7%.

Core inflation had risen gradually from 3% in May, suggesting that cost pressures were spreading beyond food and energy to other parts of the economy.

“This steady rise indicates that cost pressures are beginning to spread more broadly,” the central bank said.

Despite the recent increases, average inflation over the 12 months to September remained relatively low. Average headline inflation stood at 3.4%, while average core inflation was 3.3%.

Both measures remained below the central bank’s medium-term inflation target of 5% for core inflation.

The Bank of Uganda has raised its inflation forecast for the next 12 months, citing expectations of higher international oil prices, continued depreciation of the Shilling and rising food costs.

The central bank now expects average core inflation to range between 5.5% and 6%, while headline inflation is projected to average between 7% and 7.5% over the next year.

“The inflation outlook has therefore been revised upwards on account of these factors,” BoU said.

The bank warned that inflation could rise further if geopolitical conflicts intensify, disrupting global trade and increasing fuel, transport and production costs.

Further depreciation of the Shilling could make imports more expensive, while unfavourable weather conditions could reduce agricultural output and push food prices higher.

The central bank also identified stronger domestic demand and continued increases in food and fuel prices as risks that could cause inflation to spread more widely across the economy.

However, favourable weather conditions could boost food production and moderate prices. Weaker demand or a significant decline in international commodity prices could also ease inflationary pressures.

Uganda’s economy continued to expand, although growth moderated in the quarter ending September 2026.

The Bank of Uganda estimated economic growth at approximately 6.4% during the quarter, compared with 6.8% in the quarter ending June 2026, according to figures reported by the Uganda Bureau of Statistics.

Business activity continued to expand, although at a slower pace, while business confidence remained positive despite weakening slightly in September.

Consumer confidence also declined marginally as households became less optimistic about the economic outlook.

The central bank has lowered its economic growth forecast for the 2026/27 financial year to between 6% and 6.5%, down from its earlier projection of 7% to 7.5%.

It attributed the downgrade to higher global and domestic borrowing costs, a weaker Shilling, elevated energy prices and uncertainty arising from geopolitical tensions.

Higher borrowing costs could constrain investment and consumer spending, while rising fuel and transport expenses could increase operating costs for businesses and put additional pressure on household budgets.

Nevertheless, the Bank of Uganda expects growth to strengthen over the medium term, reaching an average of approximately 8%.

The projected improvement is expected to be supported by private investment, increased exports, developments in the oil sector and implementation of the government’s Tenfold Growth Strategy.

However, the bank cautioned that persistent increases in fuel and transport costs, prolonged global conflicts, trade disruptions, adverse weather conditions and tighter credit could weaken growth further.

Conversely, stronger private investment, favourable weather and reduced geopolitical tensions could support a faster economic expansion.

The Bank of Uganda has also increased the amount of customer deposits commercial banks must hold as reserves at the central bank.

The Cash Reserve Requirement (CRR) was raised from 11% to 13.5%, effective September 24, 2026.

The measure is intended to reduce excess liquidity in the banking system and strengthen the transmission of monetary policy to the wider economy.

By requiring banks to hold a larger share of their deposits as reserves, the central bank seeks to limit the amount of money available for lending and reduce the risk that excess liquidity will fuel inflation.

“The BoU raised the Cash Reserve Requirement (CRR) to 13.5 percent from 11 percent, effective 24 September 2026, to prevent excess liquidity from becoming a destabilising factor and to strengthen monetary policy transmission,” the statement said.

Following the increase in the Central Bank Rate (CBR), the rediscount rate rose to 15%, while the bank rate increased to 16%.

The CBR is the main policy instrument the Bank of Uganda uses to influence borrowing costs, spending, saving and investment across the economy.

Changes in the rate can affect commercial banks’ lending and deposit rates, although the extent and timing of any adjustments depend on individual banks and market conditions.

The central bank said the CBR band remained at two percentage points.

Bank of Uganda said global uncertainty, geopolitical tensions, elevated oil prices and tighter international financial conditions were increasing pressure on the Shilling and raising the risk of imported inflation.

The decision to raise the policy rate is intended to contain these pressures before they become entrenched in the economy.

Higher interest rates can help moderate demand and discourage excessive borrowing and spending, potentially easing inflation. However, they can also increase borrowing costs for households and businesses, with possible implications for investment and economic growth.

The central bank said its immediate priority was to keep inflation expectations anchored around the medium-term target while protecting price stability and the stability of the financial system.

“This is intended to contain inflationary pressures, limit second-round effects from higher energy prices and exchange rate depreciation, and anchor inflation expectations around the medium-term target,” the central bank said.

The Bank of Uganda said it would continue monitoring domestic and international developments and remained prepared to take further action if necessary to safeguard price stability and financial stability.

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