Uganda’s central bank has raised its benchmark interest rate by 225 basis points to 12 percent, its highest level since 2017, in an emergency move to stem the shilling’s sharp depreciation against the US dollar.
The Bank of Uganda announced the increase on Wednesday, October 14, raising the Central Bank Rate to 9.75 percent after holding its benchmark rate steady at previous policy meetings. The decision marks a return to monetary tightening as mounting pressure on the local currency threatens to push inflation higher.
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Michael Atingi-Ego, governor of the Bank of Uganda, said the country’s external position had deteriorated significantly since the bank’s last monetary policy meeting in August, requiring a stronger response to the currency’s decline.
“Since the bank’s last meeting in August, the current account had worsened significantly,” Atingi-Ego said at a press conference, explaining the factors behind the emergency decision.
The shilling has fallen to successive record lows against the dollar in October, extending its losses to about 12% since the beginning of the year. The depreciation has been driven partly by rising demand for foreign currency from oil importers facing higher global energy prices, alongside capital outflows from Uganda’s government bond market.
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Traders and the central bank have linked the pressure on the currency to soaring energy prices associated with the Iran war, which have increased the cost of importing oil and heightened demand for dollars. Foreign investors withdrawing from government bonds have added to the pressure on the shilling.
Atingi-Ego warned that continued depreciation could feed into domestic inflation, as a weaker currency makes imported goods and commodities more expensive. The rate increase is intended to tighten monetary conditions and help contain these pressures.
Higher interest rates can support a currency by making local-currency assets more attractive to investors and discouraging demand for foreign exchange. However, the move also raises borrowing costs for businesses and households, potentially weighing on credit growth, investment and consumer spending.
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The emergency hike underscores the challenge facing Uganda’s monetary authorities as they seek to stabilise the shilling without placing excessive pressure on economic activity. With demand for dollars elevated and foreign investors reducing their exposure to government debt, the effectiveness of the increase will depend partly on whether it helps restore confidence in the currency and eases pressure on the foreign exchange market.
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Faith Omoboye is a foreign affairs correspondent with background in History and International relations. Her work focuses on African politics, diplomacy, and global governance.
