Uganda Holds Interest Rate at 12% as Inflation Risks Rise and Growth Outlook Weakens

The Bank of Uganda has maintained its benchmark Central Bank Rate (CBR) at 12%, choosing to assess the impact of its aggressive October rate increase before introducing further monetary tightening.

The decision comes against a challenging economic backdrop: rising inflation, a weakening currency and a downward revision to economic growth projections.

In October, the central bank raised its policy rate by 225 basis points, from 9.75% to 12%, in an emergency move aimed at stabilising the Uganda shilling and containing inflationary pressures.

Although the shilling has recovered some ground, it remains more than 11% weaker against the US dollar this year, highlighting the continuing vulnerability of Uganda's external position.

Uganda's headline inflation climbed to 5.8% in October, its highest level in three years, driven largely by rising food and energy prices.

The central bank now expects core inflation to average between 6.0% and 6.5% over the next 12 months, exceeding its medium-term target of 5%.

This creates a difficult monetary policy environment. Higher interest rates can help contain inflation by moderating credit growth and domestic demand, but they cannot directly resolve supply-side pressures such as expensive imported fuel and food shortages.

The Bank of Uganda has also lowered its economic growth forecast for the 2026/27 financial year to between 5.5% and 6.0%, from its previous projection of 6.0% to 6.5%.

The revision reflects tighter financial conditions, elevated energy prices and broader global economic uncertainty.

Maintaining the policy rate at 12% therefore reflects an attempt to balance two competing priorities: protecting price stability while avoiding additional pressure on economic activity.

Uganda's monetary policy challenge illustrates the difficult choices facing emerging African economies when currency depreciation and imported inflation occur simultaneously.

A weaker currency increases the domestic cost of imported fuel, machinery and other essential inputs. Higher interest rates may help support currency stability, but they also increase financing costs for businesses and households.

For Uganda's private sector, sustained high borrowing costs could constrain investment, working capital and business expansion.

The decision to hold rates at 12% is not a signal that Uganda's inflation problem has been resolved. It is a decision to give previous monetary tightening more time to work.

The real test will be whether the shilling stabilizes, inflation moves closer to the central bank's 5% target and economic growth remains resilient.

Uganda is attempting to defend macroeconomic stability without sacrificing the investment and economic expansion needed to sustain long-term growth.