The Bank of Uganda (BoU) has raised its benchmark interest rate from 9.75 per cent to 12 per cent, tightening monetary policy in response to rising inflation risks driven by higher fuel prices, pressure on the shilling and growing uncertainty in the global economy.
According to the October 2026 Monetary Policy Statement, the Monetary Policy Committee (MPC), at a special meeting held on October 14, increased the Central Bank Rate (CBR) by 2.25 percentage points, equivalent to 225 basis points. The move is intended to contain inflationary pressures and prevent rising import and energy costs from triggering a broader increase in domestic prices.
The decision comes amid escalating conflict in the Middle East, which has disrupted international shipping routes and energy infrastructure, contributing to higher oil prices, freight charges and insurance costs.
The central bank warned that these developments had increased exchange rate volatility and depreciation pressures on the shilling, raising the cost of imported fuel and other goods.
“Accordingly, the MPC has raised the Central Bank Rate (CBR) by 225 basis points to 12.0 percent in October 2026. This is intended to contain inflationary pressures, limit second-round effects from higher energy prices and exchange rate depreciation, and anchor inflation expectations around the medium-term target,” the central bank said in its October Monetary Policy Statement.
Uganda's headline inflation rose to 4.6 per cent in September 2026, up from 4.1 per cent in August, mainly driven by higher food crop prices and fuel costs, according to the statement.
Core inflation, which provides an indication of underlying price pressures by excluding certain volatile components, also increased to 3.7 per cent in September from 3.5 per cent in August and 3.0 per cent in May.
Despite these increases, annual average headline and core inflation remained relatively moderate at 3.4 per cent and 3.3 per cent, respectively, over the 12 months to September. However, the Bank of Uganda said the outlook had deteriorated because of rising international energy prices, exchange rate depreciation and higher domestic food prices.
The central bank now projects core inflation to average between 5.5 and 6.0 per cent over the next 12 months, while headline inflation is expected to range between 7.0 and 7.5 per cent.
These projections suggest that inflation could rise above the central bank's medium-term target of 5 per cent for core inflation, increasing the risk that temporary price shocks could become more persistent.
By raising the CBR, the central bank aims to tighten financial conditions, moderate demand pressures and prevent higher fuel and import costs from spreading more widely across the economy.
The Bank of Uganda attributed the challenging economic environment partly to the escalation of conflict in the Middle East and its impact on global energy markets and international trade.
According to the October Monetary Policy Statement, Uganda's current account deficit widened by US$1.4 billion to US$4.6 billion, reflecting lower agricultural commodity prices, particularly for coffee and cocoa, reduced tourism receipts and higher oil-related import costs.
The goods deficit widened to US$2.8 billion in the 12 months to August 2026, from US$2.4 billion a year earlier. The services deficit also increased, reaching US$3.3 billion from US$2.2 billion, largely due to higher freight charges.
These external pressures have contributed to depreciation pressures on the shilling, making imports more expensive and increasing the risk of further domestic price increases.
For Uganda, which relies on imported petroleum products and other essential goods, sustained increases in global energy and transportation costs could raise expenses for businesses and households while complicating efforts to maintain price stability.
Alongside the interest rate increase, the Bank of Uganda raised the Cash Reserve Requirement (CRR) from 11 per cent to 13.5 per cent, effective September 24, 2026.
The measure requires commercial banks to hold a larger proportion of eligible deposits as reserves at the central bank, helping to manage liquidity in the banking system.
Explaining the rationale for tighter monetary conditions, the central bank said the higher reserve requirement was intended “to prevent excess liquidity from becoming a destabilising factor and to strengthen monetary policy transmission.”
Together, the higher CBR and CRR are intended to limit the risk of rising fuel and import costs spreading into transportation, production and other business expenses, while keeping inflation expectations anchored.
The rate increase comes as the Bank of Uganda lowers its economic growth forecast for the 2026/27 financial year, citing tighter financial conditions, exchange rate depreciation and elevated global energy prices.
The October forecast projects Uganda's economy to grow by between 6.0 and 6.5 per cent in FY2026/27, down from the previous projection of 7.0 to 7.5 per cent.
The central bank estimates that economic growth slowed to 6.4 per cent in the quarter ending September 2026, compared with 6.8 per cent recorded by the Uganda Bureau of Statistics for the quarter ending June 2026.
According to the statement, private-sector activity continued to expand, although at a slower pace, while consumer sentiment weakened slightly as households became less optimistic about the economic outlook.
The revised forecast highlights the challenge facing monetary policymakers: containing inflation without placing excessive pressure on economic activity.
The increase in the CBR could translate into higher borrowing costs for businesses and households if commercial banks adjust their lending rates in response to tighter monetary conditions.
Businesses that depend on bank loans to finance working capital, purchase equipment or expand operations could face higher financing expenses. Households may also encounter more expensive credit, potentially affecting consumption and demand for loans.
Higher interest rates can moderate borrowing and spending, helping to ease demand-driven inflationary pressures. However, tighter credit conditions may also slow private investment and economic activity in the short term.
The central bank's objective is to contain inflation before rising costs become entrenched across the economy, thereby protecting purchasing power and supporting price stability over time.
Despite the near-term challenges, the Bank of Uganda expects economic growth to strengthen to an average of about 8 per cent over the medium term.
The projected recovery is expected to be supported by private investment, stronger exports, anticipated developments in the oil sector and continued implementation of the government's Tenfold Growth Strategy.
Nevertheless, the outlook remains exposed to several risks, including prolonged geopolitical tensions, elevated international energy and transportation costs, adverse weather conditions and tighter-than-expected financial conditions.
The central bank said the MPC would continue assessing domestic and global economic developments and remain ready to take additional measures where necessary to preserve price and financial stability.
Following the latest decision, the CBR corridor remains at plus or minus two percentage points, while the rediscount rate stands at 15 per cent and the bank rate at 16 per cent.
The latest policy shift signals the central bank's determination to contain emerging inflationary pressures, even as Uganda navigates external economic shocks and a more challenging growth environment.