In a decisive move to tame mounting inflationary pressures, the Bank of Uganda (BoU) has raised its benchmark Central Bank Rate (CBR) by 2.25 percentage points to 12 percent, marking the first rate adjustment since October 2024.
Announcing the monetary tightening, central bank officials cited a compounding convergence of external and domestic shocks, including a weakening Ugandan shilling, soaring fuel prices driven by Middle East conflicts, and heightened risks of second-round inflation spreading across the economy.
The policy shift comes as households grapple with an escalating cost of living and businesses face severe headwinds from expensive imports, higher transport costs, and tightened credit conditions.
The Macroeconomic Squeeze: Shilling Slide and Fuel Surges
The Ugandan shilling has faced sustained downward pressure throughout the year, losing more than 11 percent of its value against the US dollar. Commercial banks have quoted the US currency at approximately Shs 4,100, a steep climb from about Shs 3,605 recorded in March.
Concurrently, pump prices for petroleum products have escalated significantly. Petrol is retailing between Shs 6,800 and Shs 7,000 per litre, while diesel has surpassed Shs 7,000 in various markets across the country. These hikes reflect a combination of international oil supply disruptions, currency depreciation, and a Shs 200-per-litre excise duty increase introduced in July.
Small-scale traders and manufacturers are bearing the brunt of the cost escalation. Faridah Nantongo, a shopkeeper in Kampala’s Katwe neighborhood, noted that transport inflation directly inflates wholesale merchandise costs.
“Experience teaches us that when fuel prices go up, the price we pay for merchandise also goes up, especially for small traders,” she warned, adding that continued pressure threatens business viability.
Manufacturers are similarly squeezed by high distribution expenses and expensive standby generator fuel during power interruptions, while importers face complex tax calculation challenges. Mbale City Industrial Division MP Karim Masaba pointed out that traders are urging the Uganda Revenue Authority (URA) and Ministry of Finance to apply historical exchange rates for goods purchased before the currency sharp depreciation.
Policy Friction: Museveni Rejects Reserve Interventions
The central bank’s tightening measures unfold against a backdrop of differing policy views between fiscal and monetary authorities.
President Yoweri Museveni firmly rejected a proposal from the central bank to deploy national foreign exchange reserves to artificially defend the shilling. Speaking during the 64th Independence Day celebrations, the President argued that squandering dollar reserves is counterproductive.
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“The governor was suggesting that he spends our dollar reserves to bring the dollar price down and I don’t agree with it. It is not correct to squander our dollars,” Museveni stated, urging citizens to minimize imports and bolster local manufacturing instead.
Meanwhile, Parliament has stepped up scrutiny over retail fuel pricing. Leader of the Opposition Joel Ssenyonyi questioned why retail prices remain excessively high despite the Uganda National Oil Company (UNOC) operating as the sole bulk importer. Deputy Speaker Thomas Tayebwa subsequently demanded a transparent price breakdown from UNOC regarding wholesale distribution to oil marketing companies. Energy Minister Dr. Monica Musenero defended the state-backed framework, describing the price spikes as multifactorial and driven largely by global geopolitical tensions.
Inflation Outlook and Growth Forecast Downgrade
The Bank of Uganda’s aggressive monetary stance is designed to prevent temporary cost shocks from becoming entrenched. Annual headline inflation rose to 4.6 percent in September, up from 4.1 percent in August, propelled by food crop and fuel price increases.
Under the revised macroeconomic projections, the central bank expects:
Core Inflation: To average between 5.5 percent and 6 percent over the next 12 months.
Headline Inflation: To reach between 7 percent and 7.5 percent—exceeding the medium-term 5 percent target.
Cash Reserve Requirement (CRR): Increased from 11 percent to 13.5 percent to restrict excess commercial bank liquidity and strengthen monetary transmission.
Reflecting the tighter financial conditions, the central bank has lowered its real economic growth forecast for the 2026/27 financial year to a range of 6 percent to 6.5 percent, down from an earlier projection of 7 percent to 7.5 percent. Economic expansion is estimated to have slowed to 6.4 percent in the quarter ending September.
While higher interest rates and borrowing costs will test private sector investment and consumer credit in the short term, policymakers maintain that restoring price stability is essential for sustainable medium-term growth.
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