KAMPALA. The Bank of Uganda (BoU) has raised its benchmark interest rate to 12 per cent from 9.75 per cent, tightening monetary policy as rising fuel prices and a weakening shilling threaten to push up the cost of living and slow economic growth.
The decision, announced on October 14, 2026, followed a special meeting of the Monetary Policy Committee (MPC), which increased the Central Bank Rate (CBR) by 2.25 percentage points in response to mounting inflation risks.
The move comes at a time when households and businesses are facing pressure from higher energy costs, exchange-rate fluctuations and uncertainty in the global economy.
According to the Bank of Uganda’s October monetary policy statement, the central bank is concerned that rising international oil prices and the depreciation of the shilling could translate into higher domestic prices if the pressures persist.
The bank warned that the combination of external shocks and adverse weather conditions could make inflation more entrenched, requiring tighter monetary conditions to keep price increases under control.
Inflation outlook worsens
Uganda’s annual headline inflation rose to 4.6 per cent in September 2026, up 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.
Core inflation excludes volatile items such as food crops and energy, helping policymakers assess whether price pressures are spreading across the wider economy.
The central bank has revised its inflation outlook upwards, projecting headline inflation to average between seven and 7.5 per cent over the next 12 months. Core inflation is expected to average between 5.5 and six per cent.
Both projections exceed the bank’s medium-term inflation target of five per cent for core inflation.
Higher fuel prices are a particular concern because their effects extend beyond motorists. Increased transport and distribution costs can raise the prices of food, manufactured goods and other essential commodities.
A weaker shilling compounds the pressure by making imported fuel, machinery, raw materials and other products more expensive in local currency.
The rate increase is intended to contain these pressures before they become more widespread, although the impact of monetary policy on prices may take time to emerge.
Borrowers and businesses face uncertainty
The increase in the Central Bank Rate could put upward pressure on commercial banks’ lending rates, potentially making credit more expensive for businesses and households.
However, the policy rate does not automatically determine the interest charged on every loan. The effect on borrowers will depend on how individual banks adjust their lending and deposit rates, as well as the terms of existing loan agreements.
For businesses that depend on borrowed money to finance stock, equipment or expansion, higher financing costs could affect investment decisions and operating margins.
Small enterprises could face additional pressure if the cost of credit rises while transport, electricity and imported inputs remain expensive.
Households seeking mortgages, business loans or other forms of financing could also be affected if lenders pass on the tighter monetary conditions.
At the same time, higher interest rates may improve returns on some savings products, depending on how banks respond to the policy change.
The central bank therefore faces the challenge of containing inflation without unnecessarily weakening domestic demand, private investment and employment.
Shilling depreciation adds to pressure
The rate increase also reflects concerns about the Uganda shilling and the country’s external position.
The Bank of Uganda reported that the current account deficit widened by $1.4 billion to $4.6 billion in the 12 months to August 2026.
The deterioration was associated with factors including lower earnings from agricultural exports, reduced tourism receipts and higher international freight costs.
The goods trade deficit widened to $2.8 billion from $2.4 billion a year earlier, while the services deficit increased to $3.3 billion from $2.2 billion.
These developments have added to pressure on the foreign-exchange market at a time when demand for dollars remains important for fuel imports and other international payments.
The weaker shilling increases the local-currency cost of imports and can contribute to inflation, particularly when businesses pass higher costs on to consumers.
The central bank has also pointed to global financial conditions, including higher interest rates in advanced economies, which can make investments in those markets more attractive and limit capital inflows into Uganda.
Growth forecast lowered
While tightening monetary policy is intended to contain inflation, the central bank has also revised its economic growth outlook downwards.
For the 2026/27 financial year, the Bank of Uganda now projects economic growth of between six and 6.5 per cent, compared with its earlier forecast of seven to 7.5 per cent.
The revised outlook reflects tighter financial conditions, currency depreciation, elevated energy prices and uncertainty arising from geopolitical developments.
The bank nevertheless expects growth to strengthen to about eight per cent over the medium term, supported by private investment, exports, anticipated developments in the oil sector and the government’s Tenfold Growth Strategy.
The projections underline the difficult choices facing policymakers as they seek to preserve price stability while maintaining the conditions necessary for economic expansion.
If inflationary pressures persist, businesses could face a combination of expensive inputs and costly financing. Conversely, if monetary tightening helps stabilise prices and the exchange rate, it could improve economic predictability over time.
Central bank maintains focus on price stability
The October rate increase follows an earlier adjustment to the Cash Reserve Requirement, which was raised from 11 per cent to 13.5 per cent, effective September 24, 2026.
The requirement determines the proportion of eligible commercial bank deposits that must be held as reserves at the central bank rather than being available for lending.
Following the latest policy decision, the rediscount rate rose to 15 per cent, while the bank rate increased to 16 per cent.
Together, the measures reflect the central bank’s effort to contain inflationary pressures and address risks arising from the exchange rate and external economic conditions.
The Bank of Uganda has indicated that it will continue assessing domestic and international developments and remains prepared to take further action if necessary.
For consumers and businesses, the immediate concern will be whether the tighter monetary conditions help moderate inflation without placing excessive pressure on borrowing, investment and economic activity.
The coming months will provide a clearer indication of how the rate increase affects lending conditions, the shilling, inflation and Uganda’s broader growth prospects.