BoU maintains lending rate at 12 percent amid inflation pressures

KAMPALA. The Bank of Uganda (BoU) has maintained its benchmark lending rate at 12 percent, opting to hold borrowing costs steady despite rising inflation, a weakening shilling and higher international oil prices.

The decision means the Central Bank Rate (CBR), which guides commercial banks’ lending rates, remains unchanged following an increase from 9.75 percent to 12 percent at the October monetary policy meeting.

However, the central bank has tightened monetary conditions through a widening of the CBR corridor, signalling continued concern over liquidity conditions and the risk of inflation spreading across the economy.

In its November Monetary Policy Statement released on Monday, the Monetary Policy Committee (MPC) widened the CBR bands from plus or minus two percentage points to plus or minus three percentage points.

The adjustment raises the rediscount rate to 16 percent from 14 percent and the bank rate to 17 percent from 15 percent.

The rediscount and bank rates are reference rates used in the central bank’s monetary operations and lending arrangements with commercial banks.

BoU Governor Michael Atingi-Ego said the decision to maintain the CBR at 12 percent would allow previous monetary policy measures to take effect while the committee continues assessing inflation developments and the risks facing the economy.

The decision comes as businesses and households face renewed cost pressures from rising fuel prices, exchange rate depreciation and adverse weather conditions.

Headline inflation rose to 5.8 percent in October from 4.6 percent in September, while core inflation increased to 4.4 percent from 3.7 percent, indicating that price pressures are spreading beyond volatile food and energy items.

Although the 12-month average headline and core inflation remained relatively moderate at 3.6 percent and 3.3 percent respectively, both were below the central bank’s medium-term target of 5 percent.

BoU warned that the depreciation of the shilling and higher global energy prices, partly arising from the conflict in the Middle East, had increased the risk of further domestic price increases.

The central bank projects headline inflation to average between 7.5 percent and 8 percent over the next 12 months, while core inflation is expected to range between 6 percent and 6.5 percent.

The projected increase could further complicate business planning, particularly for manufacturers and import-dependent enterprises facing higher costs for fuel, machinery, raw materials and other production inputs.

BoU also warned that a worsening current account deficit and reduced portfolio investment inflows could exert additional pressure on the shilling, increasing the cost of imported goods.

Growth concerns

The decision to hold the benchmark rate also comes against a backdrop of slowing economic activity, with the central bank lowering its growth forecast for the 2026/27 financial year.

BoU now expects the economy to expand by between 5.5 percent and 6 percent, down from its earlier projection of 6 percent to 6.5 percent.

The central bank’s high-frequency indicators estimate that economic growth moderated to about 5.3 percent in the quarter to September, compared with 6.8 percent reported by the Uganda Bureau of Statistics for the quarter ended June.

The slowdown reflects a deteriorating global economic environment, the delayed effects of drought experienced in the first half of the year, tighter financial conditions and higher international energy prices.

Business and consumer sentiment for the three months to December remained optimistic, although confidence weakened amid less favourable expectations about future economic conditions.

BoU said the existing monetary conditions were sufficiently tight to contain inflationary pressures, making it appropriate to maintain the CBR while allowing previous policy measures to work through the economy.

The central bank expects economic growth to strengthen over the medium term, averaging about 8 percent over the next five years, supported by private investment, stronger exports, developments in the oil sector and implementation of government’s Tenfold Growth Strategy.

However, it warned that elevated global energy and food prices, tight shilling liquidity, adverse weather and delays in oil production could undermine the recovery.

The MPC said future monetary policy decisions would continue to be guided by incoming economic data, the inflation outlook and developments in global financial markets.

BoU said maintaining price stability remained central to achieving sustainable socioeconomic transformation and supporting the country’s tenfold economic growth ambition.