KAMPALA, Uganda — The Bank of Uganda (BoU) has raised its Central Bank Rate (CBR) by 225 basis points to 12%, tightening monetary policy in response to rising inflation risks, pressure on the Ugandan shilling and growing uncertainty in the global economy.

In its Monetary Policy Statement for October 2026, issued on Wednesday, October 14, the Monetary Policy Committee (MPC) increased the benchmark rate from 9.75%, citing escalating conflict in the Middle East, higher international oil prices and worsening external economic conditions.

The central bank said the developments had intensified depreciation pressures on the shilling and increased the risk that higher import and energy costs would feed into domestic prices.

The decision signals a more restrictive monetary policy stance as the Bank of Uganda seeks to contain inflation while maintaining price and financial stability.

Inflation projected to rise

Uganda's annual headline inflation rose to 4.6% in September 2026, up from 4.1% in August, driven by higher food crop and fuel prices. Core inflation, which excludes certain volatile price components, also increased to 3.7% in September from 3.5% in August.

Despite the recent increases, annual average headline and core inflation over the 12 months to September stood at 3.4% and 3.3%, respectively, remaining below the central bank's medium-term core inflation target of 5%.

However, the outlook has deteriorated. The Bank of Uganda now projects core inflation to average 5.5–6.0% and headline inflation 7.0–7.5% over the next 12 months.

These figures are forecasts, not current inflation rates, and reflect concerns about continued increases in energy prices, exchange rate depreciation and domestic food costs.

The central bank warned that sustained increases in fuel and food prices could spread to other goods and services, particularly if businesses pass higher transport, production and import costs on to consumers.

Shilling depreciation and external pressures

The monetary policy decision comes amid a deterioration in Uganda's external accounts.

According to the statement, the current account deficit widened by US$1.4 billion to US$4.6 billion. The Bank attributed the deterioration to lower agricultural commodity prices, particularly coffee and cocoa, reduced tourism receipts amid temporary travel restrictions, and rising oil prices.

Over the 12 months to August 2026, the goods deficit widened to US$2.8 billion from US$2.4 billion a year earlier. The services deficit increased to US$3.3 billion from US$2.2 billion, while the primary income deficit rose to US$1.7 billion from US$1.4 billion.

Remittances provided some support, with the secondary income balance improving to US$3.1 billion from US$2.7 billion.

The Bank also pointed to tighter financial conditions in advanced economies, which have made foreign investments relatively more attractive and limited capital inflows into Ugandan financial assets.

The resulting pressure on the shilling, combined with elevated international oil prices, has contributed to higher domestic fuel pump prices.

A weaker shilling can make imported fuel, machinery, medicines, industrial inputs and other goods more expensive in local currency, potentially increasing costs for households and businesses.

Economic growth outlook revised downwards

While economic activity remains resilient, the central bank has lowered its growth forecast for the 2026/27 financial year.

The October forecast round projects economic growth of 6.0–6.5% in FY2026/27, down from the previous projection of 7.0–7.5%.

The Bank attributed the downward revision to tighter global and domestic financial conditions, recent exchange rate depreciation, elevated global energy prices and geopolitical uncertainty.

Growth for the quarter ending September 2026 is projected at 6.4%, compared with the 6.8% reported by the Uganda Bureau of Statistics for the quarter ending June 2026. The September figure is a projection, rather than a final reported outturn.

The central bank said private-sector activity continued to expand, although at a slower pace. Business confidence remained positive in September but moderated, while consumer sentiment weakened marginally amid less favourable economic expectations.

Over the medium term, the Bank expects growth to strengthen to an average of about 8%, supported by private investment, stronger exports, anticipated developments in the oil sector and implementation of the Government's Tenfold Growth Strategy.

However, it cautioned that prolonged geopolitical tensions, higher energy and transport costs, adverse weather and tighter-than-expected financial conditions could weigh further on economic activity.

What the rate increase means for businesses and borrowers

The increase in the Central Bank Rate is intended to restrain inflationary pressures, limit the secondary effects of higher energy prices and shilling depreciation, and keep inflation expectations anchored around the medium-term target.

In practical terms, tighter monetary policy can put upward pressure on commercial banks' lending rates, making borrowing more expensive for businesses and households. If lending costs rise, firms may delay investments or expansion plans, while consumers may face higher costs when financing major purchases.

Higher interest rates can also moderate demand across the economy, helping to ease price pressures over time. However, the pace and extent of any changes in commercial lending and deposit rates will depend on how individual banks respond to the central bank's decision and broader market conditions.

Businesses dependent on imported inputs and fuel-intensive transport may face additional cost pressures from the weaker shilling and higher energy prices, potentially complicating investment and pricing decisions.

The central bank faces the challenge of containing inflation without unduly weakening economic activity at a time when growth projections have already been revised downwards.

Cash reserve requirement also increased

The October rate increase follows an earlier tightening measure involving the Cash Reserve Requirement (CRR), which the Bank of Uganda raised from 11% to 13.5%, effective September 24, 2026.

The CRR determines the proportion of eligible deposits commercial banks must hold as reserves at the central bank. Raising the requirement can limit the funds available for lending and strengthen the transmission of monetary policy.

The MPC said the measure was intended to prevent excess liquidity from destabilising the economy and to strengthen the effectiveness of monetary policy.

Following the latest decision, the rediscount rate stands at 15%, while the bank rate is 16%, reflecting their respective margins above the CBR.

Global risks remain a concern

The Bank of Uganda said risks to the inflation outlook remain tilted upwards, particularly if geopolitical conflicts escalate further, international energy and transport costs rise, or the shilling comes under renewed depreciation pressure.

Adverse weather conditions could also affect agricultural production and food prices, while stronger domestic demand or persistent increases in fuel and food costs could feed into broader inflation.

On the other hand, favourable weather, weaker global or domestic demand and a sharper decline in international commodity prices could help ease inflationary pressures.

The MPC said it would continue assessing domestic and global economic developments and remained ready to take additional measures as necessary to preserve price and financial stability.

The October decision underscores the central bank's concern that external shocks could translate into sustained domestic inflation, even as Uganda's economy continues to expand.