The Bank of Uganda lifted its Central Bank Rate to 12 per cent from 9.75 per cent on October 14, as part of efforts to manage mounting inflation risks and stabilise the economy. The move makes borrowing more expensive across the country, where Ugandans are already contending with rising fuel prices and pressure on the shilling.
Higher interest rates are traditionally used to discourage spending and investment, helping to contain inflation. However, analysis suggests the policy may affect different borrowers in different ways. A 2023 FinScope Uganda survey found that seven in every ten adults were operating a personal budget deficit, spending more than they earned. Among those who had borrowed and were repaying loans, 44 per cent said they borrowed to meet regular expenses, while 22 per cent borrowed for business purposes and 12 per cent to cover unexpected costs.
The distinction matters because a business owner might postpone an investment if credit becomes more expensive, while a household borrowing to cover essential monthly expenses may have no realistic option to delay. The Bank's rate increase can help contain wider inflationary effects from global pressures like oil prices, which domestic policy alone cannot address.
Households now face two interconnected risks: if inflation persists, their money buys less, and if credit becomes more expensive, those dependent on borrowing may struggle to bridge the gap between earnings and essential expenses. The consequences of monetary tightening will not be evenly distributed across society.