Uganda Holds Policy Rate at 12% But Tightens Liquidity as Inflation Outlook Worsens

KAMPALA—The Bank of Uganda has kept its Central Bank Rate at 12 per cent, choosing to give October’s emergency interest-rate increase more time to affect borrowing, spending and foreign-exchange demand while reinforcing the squeeze on liquidity in the banking system. The Monetary Policy Committee maintained the benchmark rate at its 9 November meeting, less than a month after raising it from 9.75 per cent to 12 per cent in an extraordinary 225-basis-point move. The November decision should not be interpreted as the beginning of monetary easing. Alongside the hold, the central bank widened the operating band around the CBR from two to three percentage points and raised the rediscount rate to 16 per cent and the bank rate to 17 per cent. These adjustments increase the cost faced by commercial banks that need specified forms of central-bank liquidity. They reinforce the Bank of Uganda’s objective of keeping shillings relatively scarce as it responds to currency depreciation, higher international energy costs and rising domestic inflation. bou.or.ug For businesses, the important distinction is between a pause in the headline policy rate and an easing of financial conditions. Uganda has the former, but not the latter. A rate hold that still tightens financial conditions The CBR is the central bank’s principal monetary-policy signal. It is intended to guide short-term money-market rates and, over time, influence the cost of deposits, commercial loans and other financial instruments. By leaving the rate at 12 per cent, the central bank avoided adding another immediate increase to October’s unusually large adjustment. Widening the operating corridor, however, changes the price at which liquidity is exchanged around the policy rate. The corridor now extends from 9 per cent to 15 per cent, compared with the previous range of 10 per cent to 14 per cent. Banks facing liquidity shortages therefore encounter a higher upper-bound rate when seeking central-bank funds. Institutions with surplus money receive a lower return for depositing it through the corresponding lower facility. The arrangement is designed to encourage banks to trade liquidity more actively among themselves and manage their cash positions more carefully. It also makes repeated dependence on central-bank funding less attractive. The rediscount and bank rates have risen from 14 per cent and 15 per cent to 16 per cent and 17 per cent respectively. These rates apply to specified transactions and lending arrangements between the central bank and commercial banks.  Widening the corridor does not automatically raise every business or household loan by an identical amount. Commercial lending rates also reflect deposit costs, the borrower’s risk profile, collateral, loan maturity, operating expenses and the negotiating relationship between a bank and its customer. It nevertheless gives banks a strong incentive to preserve cash, price liquidity more cautiously and reassess customers whose repayment capacity may be weakened by inflation or currency depreciation. The measure follows an earlier increase in the Cash Reserve Requirement from 11 per cent to 13.5 per cent, effective from 24 September. The higher requirement obliges commercial banks to hold a larger proportion of their applicable deposit base as reserves, reducing the amount immediately available for lending or investment.  Taken together, the higher reserve requirement, October’s interest-rate increase and November’s wider corridor amount to a layered monetary tightening programme rather than a single policy-rate decision. Inflation is spreading beyond food and fuel Uganda’s annual headline inflation accelerated to 5.8 per cent in October from 4.6 per cent in September, reaching its highest level in approximately three years. Core inflation, which excludes volatile food crops and energy-related items, rose from 3.7 per cent to 4.4 per cent. The distinction is economically important. The Bank of Uganda targets medium-term core inflation of 5 per cent rather than every monthly movement in headline inflation. Core inflation remained below the target in October, but its increase suggests that higher fuel, transport and import costs are spreading into a wider range of goods and services. Food inflation also rose sharply. Reuters reported that it increased to 10.7 per cent in October from 4.5 per cent in September, reflecting weather-related supply disruptions alongside higher transport and distribution costs.  The longer-term picture remains less severe than the latest annual readings suggest. Average headline inflation over the 12 months to October was 3.6 per cent, while average core inflation was 3.3 per cent. Both remained below the central bank’s medium-term target. The greater concern is what happens next. The Bank of Uganda expects headline inflation to average between 7.5 and 8 per cent over the coming 12 months. Core inflation is forecast to average between 6 and 6.5 per cent, placing the underlying measure between one and 1.5 percentage points above target. The central bank sees further shilling depreciation, persistently high international oil prices, weaker portfolio investment inflows and adverse weather as the main threats to the outlook. It has also warned that increases in fuel prices and the exchange rate are already passing into the prices of other goods and services, with the full effects still to appear.  This is the economic justification for maintaining restrictive policy even as growth weakens. Monetary policy cannot produce more food, reduce international oil prices or remove shipping disruptions. It can, however, restrain the second-round effects by reducing credit-driven demand, discouraging speculative purchases of foreign currency and preventing businesses and households from assuming that higher inflation will become permanent. The shilling is at the centre of the policy response Uganda’s inflation problem is closely connected to its external accounts. The country remains a net importer of refined petroleum products, with annual fuel consumption estimated at approximately USD2.5 billion. When international oil prices rise, importers require more dollars to purchase the same volume of fuel. That additional demand can weaken the shilling, increasing the local-currency price of fuel and other imported goods. The result is a reinforcing cycle in which higher oil prices create more demand for dollars, the currency depreciates, and the weaker exchange rate raises domestic prices further.  Uganda’s merchandise-trade figures illustrate the pressure. The country recorded a trade deficit of USD817 million in August 2026, compared with USD326 million a year earlier. Imports rose to USD2.31 billion during the month, including USD244.6 million of formal private-sector oil imports. The merchandise-trade deficit is not the same as the current-account deficit, which also covers services, income and transfers. However, the rise in imports helps explain the Bank of Uganda’s warning that deterioration in the current account could continue weakening the currency. mepd.finance.go.ug The shilling lost almost 15 per cent against the dollar between June and the end of October, trading at around USh4,245 to the dollar on 30 October. It subsequently recovered to approximately USh4,040–4,050 on 5 November as shilling liquidity became scarce and markets anticipated additional monetary tightening.  That recovery is significant, but it is not evidence that the currency problem has been permanently resolved. The shilling remained more than 11 per cent weaker against the dollar in 2026 at the time of the monetary-policy decision. Tight liquidity can support the currency by making it more expensive to obtain shillings for purchasing dollars. Higher domestic interest rates may also improve the attractiveness of Ugandan financial assets to portfolio investors. Neither effect is guaranteed. Foreign investors also consider fiscal risk, global interest rates, market liquidity and expectations about future depreciation. If the current-account deficit remains wide or petroleum importers continue demanding large amounts of foreign currency, interest rates alone may not deliver a lasting recovery. Commercial borrowers are already paying more The consequences of October’s interest-rate increase were beginning to appear before the November policy meeting. Uganda’s average weighted interest rate on shilling-denominated loans stood at 17.9 per cent in August, up from 17.32 per cent in July. That was before the emergency CBR increase and before the latest adjustment to the operating corridor. Private-sector credit was still growing strongly at that point. Outstanding credit expanded by 19 per cent over the year to August, with lending concentrated in trade, manufacturing and household borrowing.  Commercial banks have since started revising their reference rates. Absa Bank Uganda raised its shilling lending rate from 19.5 per cent to 21.75 per cent effective from 1 November. Stanbic Bank Uganda announced an increase in its shilling prime lending rate from 19.5 per cent to 21.75 per cent from 1 December, while its mortgage reference rate will rise from 17.5 per cent to 19 per cent. Dfcu Bank has announced that its shilling prime lending rate will increase from 20 per cent to 22 per cent from 1 December. Its dollar prime rate is also set to rise from 12 per cent to 14 per cent.  These are reference rates rather than the final price paid by every customer. Banks frequently add margins based on credit risk, security and the structure of the facility. Some borrowers may therefore pay substantially more. The scale of the change is nevertheless material. A 2.25-percentage-point increase on a USh1 billion floating-rate balance represents an additional USh22.5 million in annual interest expenses before fees and principal repayments, assuming the full balance remains outstanding. For a business operating on narrow margins, that increase may be large enough to change an investment decision, reduce inventory purchases, delay hiring or force higher prices onto customers. Working capital will feel the pressure first The most exposed companies are not necessarily those financing major long-term projects. Businesses dependent on overdrafts, invoice financing and revolving working-capital facilities may feel the effects sooner because those products are regularly repriced and renewed. Importers face a three-way squeeze. A weaker shilling raises the local-currency price of goods purchased in dollars. Higher interest rates increase the cost of financing imports and holding inventory. Elevated fuel and freight costs then make it more expensive to transport the goods to customers. Manufacturers face similar pressures through imported machinery, components, chemicals and packaging materials. Even companies sourcing most of their raw materials domestically may be affected through transport charges, electricity costs and supplier repricing. Construction and real estate are particularly sensitive because projects require substantial upfront financing while producing returns over long periods. Higher loan rates can delay new developments, weaken mortgage demand and increase the risk that partially completed projects encounter cash-flow difficulties. The impact on agriculture is more complicated. Tighter credit could restrict financing for seeds, fertiliser, equipment, storage and produce aggregation. Adverse weather may simultaneously reduce supply and raise food prices. Tourism, coffee and other foreign-exchange earners may benefit when their dollar revenues are converted into more shillings. The advantage diminishes where operators have dollar-denominated debt, import equipment or purchase fuel at prices linked to the exchange rate. Cheaper dollar loans carry a currency risk The considerable difference between shilling and foreign-currency lending rates may tempt some businesses to borrow in dollars. Before the latest tightening, average foreign-currency lending rates stood at approximately 7.46 per cent, substantially below the 17.9 per cent average for shilling credit. That comparison can be misleading when a borrower earns mainly in shillings. A company taking a dollar loan assumes exchange-rate risk in addition to paying interest. A 10 per cent depreciation of the shilling increases the local-currency value of the outstanding dollar principal by approximately 10 per cent before interest is considered. Foreign-currency borrowing is therefore most defensible when a business has export earnings, dollar-linked contracts or another reliable source of foreign currency. A company with shilling revenues and dollar liabilities faces a mismatch that can overwhelm the apparent saving offered by the lower interest rate. Higher government yields may crowd out businesses Monetary tightening is also increasing the government’s domestic borrowing costs. At Uganda’s 28 October Treasury bond auction, the two-year bond cleared at a yield of 16 per cent, up from 12 per cent at the comparable September auction. The five-year yield rose to 16.8 per cent, while the 15-year and 25-year instruments cleared at approximately 17.93 per cent and 18.48 per cent respectively.  Higher government yields affect businesses because banks can purchase relatively high-yielding sovereign securities instead of extending riskier private-sector loans. Unless commercial borrowers can offer a sufficiently attractive risk-adjusted return, credit may become both more expensive and harder to obtain. This creates a crowding-out risk. Monetary tightening intended to stabilise inflation and the currency may direct more domestic savings towards government debt and away from productive private investment. Higher yields will also increase the government’s future interest obligations. That could eventually reduce the fiscal space available for infrastructure, public services and development programmes unless revenue growth keeps pace with borrowing costs. Growth is slowing as financial conditions tighten The Bank of Uganda estimates that economic growth moderated to approximately 5.3 per cent in the quarter ending September, compared with 6.8 per cent in the quarter ending June. It has lowered its growth forecast for the 2026/27 financial year to between 5.5 and 6 per cent from an earlier projection of between 6 and 6.5 per cent. The revision reflects tighter domestic and international financing conditions, currency depreciation, geopolitical uncertainty, earlier drought conditions and elevated energy costs. Over the next five years, the central bank still expects growth to average approximately 8 per cent, supported by private investment, exports, the government’s Tenfold Growth Strategy and anticipated oil-sector developments. That medium-term projection is a forecast rather than a confirmed outcome. The central bank has identified delayed oil production, tight credit, adverse weather, elevated energy prices and lingering travel restrictions as risks that could prevent the economy from achieving the expected growth rate.  Uganda is therefore confronting a difficult policy combination. Inflation is being generated partly by imported energy and food-supply shocks at the same time that economic momentum is weakening. Raising interest rates cannot directly resolve those supply constraints, but failing to respond could allow depreciation and inflation expectations to become entrenched. The central bank is effectively accepting some near-term pressure on consumption and investment in exchange for protecting currency and price stability. The calculation is that a temporary credit squeeze will be less damaging than allowing inflation and exchange-rate instability to continue unchecked. The effects will extend across East Africa Uganda’s monetary squeeze will not stop at its borders. The country is an important market for Kenyan, Tanzanian and other regional producers. In August, East African Community partner states supplied 45.5 per cent of Uganda’s merchandise imports, worth approximately USD1.05 billion. Uganda’s merchandise exports to the region were about USD320 million, producing an EAC trade deficit of approximately USD730 million for the month.  A weaker Ugandan shilling makes imports from neighbouring countries more expensive for Ugandan distributors and consumers. Tighter credit compounds the problem by reducing the amount of inventory wholesalers can finance. Tanzanian and Kenyan companies selling into Uganda should pay greater attention to invoice currencies, payment periods and the financial position of their distributors. A regional exporter billing in dollars transfers much of the exchange-rate risk to the Ugandan customer. Invoicing in Ugandan shillings may support sales but leaves the exporter exposed when the proceeds are converted into its home currency. Suppliers may need to shorten the validity of quotations, review credit limits and include transparent foreign-exchange adjustment provisions in longer contracts. Businesses should also avoid assuming that an established customer will remain financially strong when financing costs and replacement costs are rising simultaneously. Regional transporters will also be affected. Higher Ugandan fuel prices, slower import demand and reduced trade volumes may weaken freight activity, while expensive working-capital finance raises the cost of maintaining vehicles, purchasing tyres and funding fuel before customers settle their accounts. Businesses should prioritise cash flow and currency matching Businesses operating in Uganda or selling into the country should prepare for restrictive financial conditions to persist into early 2027. Financial plans should test the effect of a further increase in effective borrowing costs, renewed shilling depreciation and another rise in fuel prices. Companies should review floating-rate loan clauses to understand when changes in bank reference rates affect instalments and whether the bank has discretion to reprice an existing facility. Importers and distributors may need shorter quotation-validity periods and clearly defined foreign-exchange adjustment clauses. Long fixed-price contracts become increasingly risky when both financing expenses and replacement costs are changing rapidly. Companies holding dollar debt should match those obligations against expected dollar income. Where revenues are predominantly received in shillings, reducing the open currency position may be more important than selecting the loan with the lowest nominal interest rate. Cash-flow discipline will matter more than reported profitability. A company may remain profitable on paper but experience liquidity stress if customers pay slowly, stock turnover weakens and interest payments rise. Businesses should also examine whether inventory held as protection against future depreciation is tying up too much expensive capital. Holding more stock can protect against higher replacement costs, but the benefit may be lost if borrowing rates above 20 per cent are used to finance slow-moving goods. What will determine the next policy move The next phase of monetary policy will depend on whether tighter financial conditions stabilise the currency before producing a sharper slowdown in credit and domestic demand. The shilling-dollar exchange rate will remain the most immediate indicator. Renewed depreciation would increase import costs and make another monetary adjustment more likely. A sustained currency recovery would reduce the urgency for further tightening. Core inflation will be equally important because it indicates whether fuel, food and currency shocks are becoming embedded in the broader economy. A sustained movement above the 5 per cent target would suggest that inflation is no longer confined to volatile categories. International oil prices will influence both Uganda’s import bill and the domestic inflation outlook. A meaningful decline would reduce pressure on the shilling and could allow inflation to fall faster than the central bank currently forecasts. Commercial-bank lending rates and private-sector credit growth will show how strongly the October and November decisions are affecting the real economy. A sharp deceleration in lending could weaken investment and consumption more than the central bank intends. Government-security yields will reveal whether monetary tightening is increasing competition between public borrowing and private credit. Food prices and weather conditions will determine whether agricultural output provides an offset to imported inflation. Portfolio investment and foreign-exchange inflows will also be critical. Stronger inflows would support the shilling and reduce the probability of another rate increase, while renewed capital outflows would intensify pressure on both the currency and domestic interest rates. Uganda’s November decision is therefore best understood as a strategic pause inside an active tightening cycle. The policy rate has stopped rising for now, but the central bank is still making liquidity expensive, encouraging commercial banks to conserve shillings and signalling that currency and inflation stability take priority over cheaper credit. Whether that squeeze succeeds will depend less on the 12 per cent headline rate than on what happens next to international oil prices, the Ugandan shilling, food supply and the external deficit.