The Bank of Uganda (BoU) has tightened monetary policy to curb inflationary pressures from the weakening shilling, raising its benchmark interest rate to 12 per cent as the exchange rate approached Shs4,000 per US dollar.
Governor Michael Atingi-Ego said the measures are intended to contain the impact of exchange rate depreciation and rising fuel prices on domestic prices, rather than defend a specific exchange rate level.
In its October 2026 Monetary Policy Statement, the central bank said mounting external pressures, including higher international oil prices, geopolitical tensions and tighter global financial conditions, had intensified depreciation pressures on the shilling and increased the risk of inflation spreading across the economy.
At a special Monetary Policy Committee meeting on October 14, the bank raised the Central Bank Rate (CBR) by 2.25 percentage points, from 9.75 per cent to 12 per cent.
The decision followed an earlier increase in the Cash Reserve Requirement (CRR), which was raised from 11 per cent to 13.5 per cent effective September 24.
The two measures work through different channels but share the objective of tightening financial conditions and limiting inflation.
How the measures work
The increase in the CRR requires commercial banks to hold a larger proportion of their deposits as reserves at the central bank, leaving less money available for lending.
By withdrawing excess liquidity from the banking system, BoU expects to strengthen the transmission of monetary policy and prevent surplus liquidity from adding to instability in the financial system.
The increase in the CBR, meanwhile, signals tighter monetary conditions and can push up borrowing costs across the economy.
Higher interest rates can moderate credit growth and domestic demand, helping to limit the extent to which businesses pass higher fuel, transport and other costs on to consumers.
Tighter monetary conditions can also support demand for shilling-denominated financial assets relative to foreign assets, depending on investor confidence and developments in international markets.
However, the measures do not guarantee an immediate appreciation of the shilling, particularly when external pressures on the currency remain strong.
External pressures mount
BoU attributed the recent depreciation partly to heightened geopolitical tensions in the Middle East, which have disrupted shipping routes and energy infrastructure, pushing up international oil prices, freight charges and insurance costs.
The bank also said rising interest rates in advanced economies had made foreign investments relatively more attractive, limiting capital inflows into Uganda and contributing to pressure on the exchange rate.
Uganda’s current account deficit deteriorated by $1.4 billion to $4.6 billion, according to the monetary policy statement. The bank attributed the deterioration to lower agricultural commodity prices, particularly coffee and cocoa, reduced tourism receipts and rising oil prices.
The weaker shilling has also increased domestic fuel costs, adding to inflationary pressures.
Headline inflation rose to 4.6 per cent in September from 4.1 per cent in August, while core inflation increased to 3.7 per cent from 3.5 per cent over the same period.
Although annual average headline and core inflation remained below the bank’s medium-term target, BoU warned that the combination of fuel-price shocks, exchange rate depreciation and adverse weather conditions could cause inflation to become entrenched if not addressed early.
The bank now projects core inflation to average between 5.5 and six per cent over the next 12 months, while headline inflation is projected at between seven and 7.5 per cent.
No fixed exchange rate target
BoU’s intervention is aimed at maintaining price and financial stability, rather than fixing the shilling at a particular level against the US dollar.
Under this approach, the exchange rate continues to be determined by market forces, with the central bank seeking to limit disruptive movements and contain the inflationary consequences of depreciation.
The distinction is important because the central bank’s immediate objective is to prevent exchange rate pressures from feeding into a broader rise in prices, rather than promise a return to a particular exchange rate.
The bank said it would continue assessing domestic and global economic developments and take additional measures if necessary to preserve price and financial stability.
Growth faces a trade-off
The tighter monetary stance comes with risks for businesses and borrowers, as higher interest rates can raise the cost of credit and weigh on investment and consumption.
BoU has already revised down its economic growth forecast for the 2026/27 financial year to between six and 6.5 per cent, from an earlier projection of seven to 7.5 per cent.
The bank attributed the downgrade largely to tighter domestic and global financial conditions, the recent depreciation of the shilling and elevated global energy prices.
It nevertheless expects growth to strengthen over the medium term as external pressures ease, supported by private investment, stronger exports, anticipated oil-sector developments and implementation of the government’s Tenfold Growth Strategy.
For now, the central bank’s priority is to prevent the weaker shilling and higher energy costs from triggering a sustained increase in inflation, even as tighter monetary conditions weigh on near-term economic activity.
