The central bank’s sharpest recent monetary policy tightening could revive demand for government securities after falling Treasury bill yields drove investors towards listed shares, while raising financing costs for businesses.
Uganda’s renewed stock market rally faces a fresh test after the Bank of Uganda (BoU) raised its benchmark interest rate to 12%, a move that could redirect investors towards government securities and increase financing costs for listed companies.
The central bank raised the Central Bank Rate (CBR) by 225 basis points, from 9.75% to 12%, at a special Monetary Policy Committee meeting on October 14, reversing a period of relative stability as pressure on the shilling and rising global oil prices heightened inflation risks.
The decision presents a dilemma for financial markets. While tighter monetary policy is intended to contain inflation and stabilise the currency, it could also make borrowing more expensive, weaken corporate earnings and challenge the growing investor appetite for equities on the Uganda Securities Exchange (USE).
The rate increase comes barely a week after reports that falling Treasury bill yields were encouraging investors to seek better returns through listed shares, particularly companies offering dividends and prospects of capital gains.
In the first quarter of 2026, trading turnover on the USE nearly doubled to Shs34 billion from Shs17 billion in the corresponding period of 2025, reflecting increased activity around corporate dividend announcements and payments.
That momentum could now face a test as investors reassess the returns available from equities against the relative predictability of government securities.
When Treasury bill and bond yields rise, investors may find government debt more attractive relative to shares, particularly where the expected dividend yield from a listed company offers only a modest premium over fixed-income investments.
However, the policy rate does not automatically determine Treasury yields, which also depend on investor demand, government borrowing requirements, liquidity and expectations about future interest rates.
The rate hike could also affect listed companies through higher borrowing costs, especially businesses that rely on bank credit to finance operations, expansion and working capital.
Higher interest expenses can reduce the profits available to shareholders and potentially constrain dividend payments. Companies facing weaker earnings expectations could consequently come under pressure as investors reassess their valuations.
The impact, however, will vary across sectors and individual businesses. Companies with substantial cash reserves, limited debt or strong pricing power may be better positioned to withstand tighter financial conditions than heavily indebted firms.
Dr Kenneth Egesa, the Bank of Uganda’s Director of Communications, said the decision was necessary to protect the purchasing power of households and businesses amid mounting economic pressures.
“Given the need to preserve price stability and the purchasing power of individuals and businesses, we had to take action before the situation became worse. You do not want to wait until it’s beyond control,” Egesa said.
He acknowledged that the policy shift would raise the cost of credit and urged businesses to reconsider their investment plans and working capital requirements.
“The cost of borrowing is going to go up,” he said.
Egesa also said the central bank had revised its economic growth forecast downwards from an earlier projection of between 7% and 7.5% to between 6% and 6.5%.
The lower growth projection adds another consideration for equity investors because slower economic activity can affect consumer spending, corporate revenues and companies’ expansion plans.
Inflation and shilling pressures drive policy shift
The Bank of Uganda’s decision was driven by growing risks from international oil prices, rising shipping and insurance costs, and pressure on the exchange rate.
The central bank has warned that the depreciation of the shilling could make imported goods more expensive, while higher fuel and transport costs could feed into domestic prices. It raised the policy rate to contain inflationary pressures and prevent the initial price increases from spreading more broadly across the economy.
For investors, the challenge is to assess whether the tighter policy will help restore macroeconomic stability without significantly weakening corporate activity.
A successful effort to contain inflation and stabilise the shilling could support investor confidence over the longer term. However, in the short term, higher borrowing costs and uncertainty over economic growth could weigh on business investment and expectations for earnings.
The stock market’s response will therefore depend not only on the headline rate increase but also on how commercial lending rates, government securities yields, inflation and corporate results evolve in the coming months.
The relationship between interest rates and stock market performance is not straightforward. Higher interest rates can make government securities more competitive with shares, but they can also influence equity valuations by increasing the rate investors use to assess future corporate earnings.
For dividend-paying companies, the critical question is whether their expected payouts and prospects for share-price appreciation continue to offer sufficient returns relative to government securities.
Investors may also distinguish between companies according to their debt exposure, cash flows and ability to maintain dividends in a tighter credit environment.
The recent rise in trading activity on the USE suggests that declining Treasury bill yields had created an incentive for some investors to explore alternatives in the equity market.
The new monetary policy stance could alter that calculation if yields on government securities increase in subsequent auctions.
Such a shift is not guaranteed, however. Investors will need to compare actual yields on newly issued Treasury bills and bonds with prevailing share prices, dividend yields and expectations for future corporate performance.
For Uganda’s stock market, the immediate test is whether listed companies can sustain earnings and dividend prospects strong enough to keep investors interested as the cost of money rises.
The central bank’s priority remains price stability, but its decision has introduced a new variable into the investment outlook, forcing market participants to reconsider the balance between the potential rewards of equities and the relative certainty of fixed-income investments.