BoU keeps lending rate at 9.75 per cent as inflation risks persist

KAMPALA — The Bank of Uganda (BoU) has maintained its benchmark Central Bank Rate (CBR) at 9.75 per cent, citing a balance between emerging inflationary pressures and the need to support economic growth.

Governor Dr Michael Atingi-Ego announced the decision on August 13 following the Monetary Policy Committee meeting, retaining the CBR at 9.75 per cent. The rediscount rate remains at 12.75 per cent, while the bank rate stays at 13.75 per cent.

Dr Atingi-Ego said the decision takes into account rising energy and food prices, which continue to exert pressure on inflation, alongside improving economic activity.

Headline inflation increased to 4 per cent in July from 3.7 per cent in June, largely driven by higher Energy, Fuel and Utilities (EFU) inflation and an increase in food crop prices.

EFU inflation rose to 14.9 per cent during the month, reflecting global petroleum price movements and the delayed effects of earlier exchange rate depreciation.

Core inflation, however, remained relatively stable at 3.4 per cent, suggesting that underlying domestic price pressures remain contained.

Dr Atingi-Ego said the central bank expects inflation to remain manageable despite the recent increase in headline inflation.

The BoU projects core inflation to average between 4 per cent and 4.5 per cent over the next 12 months, while headline inflation is expected to average between 5.5 per cent and 6 per cent over the same period.

The outlook has been supported by lower international oil prices compared with their May peak and relative stability in the Shilling.

On economic growth, Dr Atingi-Ego said the economy is estimated to have expanded by 6.4 per cent in the 2025/26 financial year, supported by a recovery in private sector credit, increased household consumption and public expenditure.

Growth is projected to accelerate to between 7 per cent and 7.5 per cent in 2026/27 and could approach 8 per cent over the medium term.

The central bank expects commercial oil production, increased exports and implementation of the government’s Tenfold Growth Strategy to provide further impetus to economic activity.

The decision to hold the CBR comes against the backdrop of strong demand for government securities, with investors showing a preference for longer-term Treasury bonds.

At the August 12 primary Treasury bond auction, BoU received Shs2.27 trillion in bids against Shs990 billion offered, representing more than twice the amount available.

The central bank accepted Shs1.146 trillion across three reopened benchmark bonds with maturities of three, 10 and 20 years.

The 10-year bond attracted the largest amount of bids at Shs949.47 billion against Shs330 billion on offer, while the 20-year bond attracted Shs861.63 billion against Shs430 billion.

The three-year bond received Shs459.33 billion against Shs230 billion on offer.

The strong demand resulted in bid-to-cover ratios of 2.199 for the 10-year bond, 2.116 for the 20-year bond and 1.495 for the three-year paper.

The 10-year bond had a cut-off yield of 15 per cent, while the 20-year bond yielded 15.65 per cent. The three-year paper had a cut-off yield of 12 per cent.

The strong demand for longer-dated securities points to continued appetite among institutional investors, including commercial banks and pension funds, for government paper offering relatively attractive returns.

Dr Atingi-Ego said the continued demand for government securities reflects liquidity conditions in the domestic financial system and investors’ assessment of the macroeconomic environment.

The latest auction also provides government with additional domestic financing as it implements its fiscal programme.

However, increased domestic borrowing can also raise concerns about the cost of government financing and the availability of credit to the private sector if demand for government securities remains high.

The central bank’s monetary policy decision therefore comes at a time when policymakers are weighing the need to support economic expansion against risks arising from energy and food prices.

Dr Atingi-Ego said the BoU would continue monitoring developments in inflation, exchange rates, commodity prices and domestic demand to ensure price stability while supporting sustainable economic growth.

The CBR’s upper and lower bands remain at plus or minus two percentage points around the policy rate.