BoU raises interest rate to 12 percent as weak shilling fuels inflation risks

KAMPALA, October 14, 2026 — The Bank of Uganda [BoU] has raised its benchmark interest rate to 12 percent from 9.75 percent set two years ago, tightening monetary policy in response to rising inflation risks driven by higher fuel prices, a weakening shilling and external economic pressures.

The decision, announced by BoU Governor Michael Atingi-Ego on Wednesday, followed a special meeting of the Monetary Policy Committee [MPC] and represents an increase of 2.25 percentage points.

The Central Bank said the move was intended to contain inflationary pressures, limit the impact of exchange rate depreciation on domestic prices and safeguard price stability.

In its October Monetary Policy Statement, BoU warned that rising international oil prices and disruptions to global shipping routes linked to escalating conflict in the Middle East had increased transport, insurance and import costs.

These pressures, combined with the weakening shilling, could make imported goods more expensive and push up the cost of fuel, food and other essential commodities.

“The decision aims to contain rising inflation risks driven by higher fuel prices and exchange rate pressures, while safeguarding price stability,” the central bank said.

The rate increase comes as inflationary pressures build, with annual headline inflation rising to 4.6 percent in September from 4.1 percent in August. Core inflation, which measures underlying price movements, also increased to 3.7 percent from 3.5 percent over the same period.

Although inflation remains below the central bank’s medium-term target of 5 percent for core inflation, BoU said sustained increases in fuel and import costs could accelerate price increases across the economy.

The bank now expects headline inflation to average between 7 percent and 7.5 percent over the next 12 months, while core inflation is projected to average between 5.5 percent and 6 percent.

The latest decision is also expected to affect borrowing costs across the financial sector. The Central Bank Rate [CBR] guides interest rates in the economy, meaning commercial banks could raise lending rates in response to tighter monetary conditions.

Higher borrowing costs could increase the cost of credit for businesses and households, potentially slowing borrowing, investment and consumer spending. The measure is intended to ease demand pressures and prevent temporary cost increases from developing into sustained inflation.

Alongside the benchmark rate increase, BoU has raised the Cash Reserve Requirement [CRR] for commercial banks from 11 percent to 13.5 percent, a move aimed at absorbing excess liquidity and strengthening the transmission of monetary policy.

The central bank said the revised reserve requirement took effect on September 24, 2026.

Under the requirement, commercial banks must retain a prescribed proportion of eligible deposits as reserves rather than use the entire amount for lending. Raising the ratio reduces the funds available for credit creation and helps the central bank manage liquidity in the financial system.

BoU has also revised down its economic growth forecast for the 2026/27 financial year, lowering the projection from between 7 percent and 7.5 percent to between 6 percent and 6.5 percent.

The downgrade reflects higher global energy prices, exchange rate pressures, tighter financial conditions and uncertainty arising from international conflicts. Economic growth was estimated at 6.4 percent in the quarter ending September 2026, down from 6.8 percent in the quarter ending June.

Uganda’s external position has also come under pressure, with the current account deficit widening by US$ 1.4 billion to US$ 4.6 billion. The deterioration has been attributed to factors including higher import costs, increased freight charges, lower earnings from some agricultural exports and reduced tourism receipts.

Despite the near-term challenges, the central bank expects economic growth to strengthen over the medium term, supported by private investment, exports, anticipated developments in the oil sector and the government’s Tenfold Growth Strategy, which aims to expand the economy to US$ 500 billion by 2040.

BoU said it would continue to monitor inflation, exchange rate movements and international economic developments, with further policy action possible if price pressures persist.

https://thecooperator.news/bou-warns-excess-govt-borrowing-could-crowd-out-private-sector/

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