Uganda's central bank raised its benchmark interest rate to 12 percent on Wednesday, October 14, the highest level since 2017. The Bank of Uganda increased the Central Bank Rate to 9.75 percent in an emergency decision to tackle the shilling's severe depreciation against the US dollar. The Bank of Uganda said the country's external position had deteriorated significantly since the last policy meeting in August, requiring stronger action. The shilling has fallen to record lows against the dollar in October, dropping around 12 percent since the start of the year.
The currency pressures stem from multiple sources. Rising global energy prices linked to the Iran war have increased demand for dollars from oil importers, while foreign investors have withdrawn from Uganda's government bond market, adding to the pressure on the shilling. The Bank of Uganda warned that continued depreciation threatens to push domestic inflation higher, since a weaker currency makes imported goods and commodities more expensive.
The rate increase tightens monetary conditions to help stabilise the currency and contain inflation. Higher interest rates make local-currency assets more attractive to investors and discourage demand for foreign exchange, supporting the shilling. However, the move carries trade-offs. Higher borrowing costs will affect businesses and households, potentially slowing credit growth, investment and consumer spending as the central bank tries to balance currency stability against economic activity.