Uganda’s shilling surged to become the world’s best-performing currency on Wednesday after the central bank delivered its biggest interest rate increase in 15 years to stem a sharp decline that had pushed the currency to a record low.
- Uganda's shilling skyrocketed to the world's best-performing currency after the central bank implemented its largest interest rate hike in 15 years to combat a historic slump.
- The currency soared by 4% to break below the 4,000 per dollar mark, reversing eight sessions of weakness driven by economic pressures.
- Uganda's central bank urgently raised the benchmark rate to 12% to fight inflation fears, rising energy costs, and currency depreciation amid global instability.
- Annual inflation accelerated to 4.6% in September, with central forecasts suggesting core inflation could reach up to 6% and headline inflation up to 7.5% in the coming year.
The shilling rose 4% to 3,984 per dollar by 5:20 p.m. in Kampala, recovering past the psychologically important 4,000 mark for the first time in eight trading sessions.
Business Insider Africa had earlier reported that Uganda’s currency had weakened to its lowest level since 1993 as rising US bond yields, foreign investor withdrawals and strong demand for dollars intensified pressure on the East African economy.
Emergency rate hike
The Bank of Uganda raised its benchmark interest rate to 12% from 9.75% at an emergency meeting, ending eight consecutive meetings at the previous rate.
Governor Michael Atingi-Ego said the move was necessary to contain inflation, limit the effects of higher energy prices and currency depreciation, and keep inflation expectations anchored.
Annual headline inflation accelerated to 4.6% in September from 4.1% in August, driven partly by rising energy costs linked to supply disruptions associated with the Iran and Ukraine wars.
The central bank now expects core inflation to average between 5.5% and 6% over the next 12 months, while headline inflation could reach 7% to 7.5%.
Limited options to defend the currency
The shilling had plunged to 4,143 per dollar, losing more than 10% since August 25 in its steepest decline among 144 currencies tracked by Bloomberg, before Wednesday’s dramatic turnaround.
Uganda’s currency has been battered by foreign investors fleeing emerging markets amid a stronger dollar and rising US bond yields. The country’s roughly $6 billion in foreign-exchange reserves covers just 2.7 months of imports, according to the International Monetary Fund, leaving authorities with limited room to intervene directly.
President Yoweri Museveni has also ruled out using reserves to prop up the currency, urging the country to cut imports and boost export and tourism earnings instead.