The Bank of Uganda has raised its benchmark interest rate to 12% to contain inflation, signalling higher borrowing costs as the Shilling faces depreciation pressures and businesses grapple with rising import expenses.
Uganda faces a fresh increase in borrowing costs after the Bank of Uganda raised its benchmark Central Bank Rate (CBR) by 225 basis points to 12%, tightening monetary policy in response to mounting inflationary pressures.
The increase presents a difficult trade-off for the economy. While higher interest rates are intended to contain inflation and help stabilise the Shilling, they could also make credit more expensive for businesses, investors and households.
Bank of Uganda Governor Dr Michael Atingi-Ego defended the decision, acknowledging that tighter monetary policy could impose short- and medium-term economic costs but arguing that the central bank must respond to growing inflation risks.
The move comes as Uganda faces a weakening currency, rising international oil prices, deteriorating external balances and uncertainty in the global economy.
Atingi-Ego has cautioned against identifying the Protection of Sovereignty Act as the principal cause of the Shilling's recent depreciation, pointing instead to wider global and domestic economic pressures.
His position places emphasis on geopolitical tensions, rising international energy prices, changing global financial conditions and pressure on foreign exchange inflows.
The assessment follows earlier warnings by the Governor to Parliament about the potential economic consequences of the original Protection of Sovereignty Bill.
During parliamentary proceedings on April 28, 2026, Atingi-Ego warned that restrictions on cross-border financial flows could weaken Uganda's foreign exchange position by discouraging foreign investment, remittances and portfolio capital.
“A country without reserves is not sovereign,” the Governor told legislators.
Parliament subsequently passed the Bill on May 5, adopting amendments that narrowed its scope and introduced safeguards. Among the changes were revisions to provisions concerning foreign influence and the exclusion of Ugandan citizens living abroad from the definition of foreigners.
The Governor's latest assessment, as described in the October monetary policy discussions, distinguishes the wider pressures affecting the Shilling from the potential implications of the legislation.
Bank of Uganda Executive Director for Research Dr Adam Mugume has also identified international financial conditions and domestic demand for foreign currency as contributors to the Shilling's depreciation.
Mugume has previously pointed to pressure from a stronger US dollar, disruptions to global shipping and increased foreign exchange demand from manufacturing, telecommunications and energy companies.
A weaker Shilling makes imported petroleum products, machinery and industrial inputs more expensive in local currency. Those higher costs can feed into production expenses and consumer prices.
The central bank's latest figures, as cited in the draft, indicate that Uganda's current account deficit widened by $1.4 billion to $4.6 billion.
The goods trade deficit reportedly deteriorated from US$2.4 billion to US$2.8 billion, while the services deficit widened from $2.2 billion to $3.3 billion. The reported changes reflect pressures including lower agricultural commodity prices, reduced tourism receipts and higher freight charges.
Inflation Risks Prompt Tighter Policy
Headline inflation rose from 4.1% in August to 4.6% in September 2026, while core inflation increased to 3.7%, according to figures cited in the draft.
The Bank of Uganda has reportedly revised its inflation outlook upwards, projecting headline inflation to average between 7% and 7.5% over the next 12 months.
Core inflation is projected to range between 5.5% and 6%, above the central bank's medium-term core inflation target of 5%.
These projections strengthen the case for tighter monetary policy if inflationary pressures persist.
The central bank has also increased the Cash Reserve Requirement from 11% to 13.5%, effective September 24, 2026, according to the draft.
The measure requires commercial banks to hold a larger proportion of their deposits as reserves, limiting the funds available for lending.
For the Governor, allowing inflation to become entrenched could ultimately impose greater costs on the economy than tightening monetary policy in the short term.
The rate increase is likely to put pressure on borrowers as commercial banks respond to the higher cost of funds.
Businesses that rely on working capital, manufacturers financing expansion and households servicing variable-rate loans could face higher repayments or more expensive new credit.
The central bank has also reportedly revised its economic growth forecast for the 2026/27 financial year downwards, from between 7% and 7.5% to between 6% and 6.5%.
The policy dilemma is increasingly pronounced. Lower interest rates could support investment and consumption but risk intensifying inflationary pressures.
Higher rates, meanwhile, could help restore price stability while constraining private-sector borrowing and economic activity.
For Uganda's monetary authorities, containing inflation has taken priority over maintaining cheaper borrowing conditions.
The governor has signalled that the Bank of Uganda remains prepared to take further measures if inflationary risks persist. For borrowers and businesses, the immediate concern is the higher cost of money, with the possibility of further policy adjustments depending on inflation, exchange-rate developments and international conditions.
The central bank's challenge is to contain inflation without unnecessarily undermining credit access and economic growth.