BoU raises interest rate to 12% as Shilling, inflation risks mount

KAMPALA. Businesses and households could face higher borrowing costs after the Bank of Uganda (BoU) raised its benchmark interest rate to 12 per cent, tightening credit conditions as the economy confronts a weaker Shilling, rising energy costs and a slower growth outlook.

The 225-basis-point increase in the Central Bank Rate (CBR), from 9.75 per cent, is intended to contain inflationary pressures by discouraging excessive borrowing and spending, while supporting the Shilling amid mounting pressure on the country’s external balances.

But the decision presents a difficult trade-off for an economy that relies on private investment and credit to finance production, trade and expansion. Businesses seeking loans to purchase raw materials, import equipment or expand operations could face higher financing costs, while households with variable-rate loans may see their repayments rise if commercial banks adjust their lending rates.

The Monetary Policy Committee (MPC), which announced the decision at an emergency meeting on Wednesday, said the deteriorating global economic environment and escalating conflict in the Middle East had increased the risks to Uganda’s price stability.

Governor Michael Atingi-Ego said the developments had worsened the country’s external position and intensified pressure on the exchange rate, increasing the likelihood that higher import costs would spread through the economy.

“The MPC assesses that the global economic environment has changed significantly since its August 2026 meeting, mainly owing to the escalation of the conflict in the Middle East and the resulting global uncertainty,” he said while reading the monetary policy statement.

The central bank’s intervention comes as headline inflation rose to 4.6 per cent in September, up from 4.1 per cent in August. Core inflation, which excludes some volatile price movements, has also increased, reaching 3.7 per cent from 3.0 per cent in May.

Although both measures remain below BoU’s medium-term inflation target of five per cent, the central bank is concerned that higher fuel prices and currency depreciation could trigger a broader increase in the cost of goods and services.

“The fuel shock seems persistent, and this combined with exchange rate depreciation and effects of El Niño weather could cause inflation to be entrenched if monetary policy does not contain these pressures now,” Mr Atingi-Ego said.

BoU now projects headline inflation to average between 7 per cent and 7.5 per cent over the next 12 months, while core inflation is expected to average between 5.5 per cent and 6 per cent.

The outlook is partly linked to Uganda’s worsening external balances, which have increased demand for foreign currency at a time when global uncertainty is discouraging investment in emerging markets.

The current account deficit widened by $1.4 billion to $4.6 billion, while the goods trade deficit increased to $2.8 billion in the 12 months to August, from $2.4 billion a year earlier.

The services deficit also widened to $3.3 billion from $2.2 billion, largely because of higher freight charges. Meanwhile, the primary income deficit rose to $1.7 billion from $1.4 billion.

A weaker Shilling makes imported fuel, machinery, industrial inputs and other goods more expensive in local currency. Businesses that depend on imports may pass some of those costs on to consumers, adding to inflationary pressure.

The central bank also said rising interest rates in advanced economies had made foreign investments more attractive relative to Ugandan financial assets, limiting capital inflows and contributing to exchange-rate depreciation.

“Significant global risk aversion due to heightened uncertainty and rising interest rates in advanced economies have increased the attractiveness of investing abroad relative to investing in Ugandan financial assets,” Mr Atingi-Ego said.

The latest rate increase follows BoU’s decision to raise the Cash Reserve Requirement for commercial banks from 11 per cent to 13.5 per cent, effective September 24. The measure requires banks to hold a larger proportion of their deposits as reserves at the central bank, reducing the funds available for lending.

With the benchmark rate now at 12 per cent, the rediscount rate has risen to 15 per cent and the bank rate to 16 per cent.

The combined measures signal a more restrictive monetary policy stance, with implications for the availability and cost of credit. However, the extent to which commercial banks increase lending rates will depend on their funding costs, risk assessments and competitive conditions.

The tightening comes as BoU lowers its economic growth forecast for the 2026/27 financial year to between six per cent and 6.5 per cent, from an earlier projection of seven per cent to 7.5 per cent.

The central bank attributed the downgrade to tighter domestic and international financial conditions, currency depreciation, higher global energy prices and geopolitical uncertainty.

“Private sector activity continues to expand, albeit at a slower pace, with business confidence remaining positive despite a moderation in September 2026,” Mr Atingi-Ego said.

Consumer sentiment has also weakened marginally, reflecting less favourable expectations about the economic outlook.

The policy challenge is whether higher interest rates can sufficiently contain inflation without significantly weakening investment, consumption and job creation. While tighter monetary conditions can help anchor inflation expectations and reduce demand-driven price pressures, they cannot directly reverse a global oil-price shock or resolve supply disruptions.

BoU expects economic growth to strengthen to an average of about eight per cent over the medium term, supported by private investment, stronger exports, developments in the oil sector and implementation of the government’s Tenfold Growth Strategy.

However, the governor warned that the outlook remained vulnerable to elevated energy and transport costs, prolonged geopolitical and trade disruptions, adverse weather and tighter-than-expected financial conditions.

“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 sector stability,” he said.

For borrowers, the immediate concern will be how commercial banks respond to the higher benchmark rate. For policymakers, the bigger test will be containing inflation and stabilising the Shilling without imposing excessive costs on an economy whose growth prospects are already facing renewed uncertainty.