BoU holds key lending rate at 9.75% as inflation stays below target

Kampala. The Bank of Uganda (BoU) has maintained its benchmark lending rate at 9.75 percent, citing subdued inflation and steady economic growth amid persistent global uncertainty.

In a monetary policy statement issued on Monday, the central bank said the current policy stance remains appropriate to support economic activity while ensuring inflation stabilises around its medium-term target of five percent.

Annual headline inflation averaged 3.5 percent in the 12 months to January 2026, while core inflation averaged 3.8 percent, both below the target. Headline inflation edged up slightly to 3.2 percent in January from 3.1 percent in December, largely due to higher prices in some service-related components.

Core inflation rose to 3.3 percent, driven mainly by increased services inflation, particularly passenger air transport. However, food crop inflation eased sharply to 3.0 percent from 4.4 percent, supported by favourable weather conditions, while energy, fuel and utilities inflation increased marginally to 1.7 percent.

The central bank said the inflation outlook has been revised slightly downward compared to its November 2025 forecast, largely due to a modest appreciation of the shilling and lower global oil and food prices. Inflation is now projected to remain between 3.8 percent and 4.3 percent in 2026 before gradually converging to the target over the medium to long term.

Despite the positive outlook, BoU warned that risks to inflation remain elevated. These include stronger-than-expected domestic demand driven by expansionary fiscal policy, exchange rate pressures, geopolitical tensions that could disrupt global supply chains, and adverse weather conditions that may push up food prices.

On the downside, the bank cited the possibility of a sharper slowdown in domestic activity, weaker global growth, and a decline in commodity prices with disinflationary effects.

Economic activity remained robust during the first three quarters of 2025, with average growth of 6.3 percent. Growth was largely driven by consumption, particularly government spending, which expanded by 22.8 percent, compared to 14.2 percent growth in household consumption.

Although growth moderated slightly in the two quarters to September 2025, high-frequency indicators suggest stronger activity in the final quarter of the year and the second half of the current financial year. Economic growth for FY2025/26 is projected at between 6.5 percent and 7.0 percent.

Over the medium term, growth is expected to strengthen further to an average of about eight percent, supported by public investment, oil and infrastructure projects, improved global conditions and increased private sector activity.

However, the central bank cautioned that growth risks are tilted to the downside, particularly from geopolitical developments that could disrupt trade and push up commodity prices, especially oil.

“The economic environment continues to be characterised by heightened uncertainty, necessitating a cautious monetary policy stance,” Governor Michael Atingi-Ego said.

The central bank rate corridor was maintained at plus or minus two percentage points, leaving the rediscount rate at 12.75 percent and the bank rate at 13.75 percent.

BoU said future policy decisions will remain data-dependent, guided by ongoing assessments of domestic and global economic conditions.