Uganda’s central bank has raised its main interest rate for the first time in two years, increasing borrowing costs in a move aimed at controlling rising prices.
The Bank of Uganda increased its Central Bank Rate (CBR) from 9.75% to 12% on Wednesday, citing higher fuel prices, pressure on the local currency and uncertainty caused by conflict in the Middle East.
The 2.25 percentage point increase is the first change since October 2024, when the bank lowered the rate to 9.75% as the outlook for inflation improved.
The decision comes as Ugandans face sharply higher fuel prices and a weakening shilling, which has lost more than 11% of its value against the US dollar this year.
Commercial banks quoted the dollar at about Shs4,100 in early October, compared with around Shs3,605 in March. The weaker currency means importers need more shillings to buy the dollars required to pay foreign suppliers.
Fuel prices have also climbed, with petrol selling at between Shs6,800 and Shs7,000 a litre in some markets, while diesel prices have risen above Shs7,000.
The increases reflect higher international oil prices, disruptions to global supplies, the weaker shilling and a Shs200-per-litre increase in excise duty on petrol and diesel introduced in July.
The combination of rising fuel costs and a weaker currency is pushing up transport and production expenses, raising the prospect of more expensive food, consumer goods and other services.
Trader and household feel the pinch
The effects are already being felt by traders and households. Faridah Nantongo, a shopkeeper in Kampala’s Katwe neighbourhood, told the Daily Monitor that rising transport costs were increasing the price she paid for merchandise.
“Experience teaches us that when fuel prices go up, the price we pay for merchandise also goes up, especially for small traders,” she said.
She warned that continued increases could force her to stop stocking some goods or close her shop.
Manufacturers are also facing higher distribution costs and additional expenses for running generators when electricity supplies are interrupted. Some businesses have so far absorbed the increases rather than pass them on to customers, but warn that this may not be sustainable.
The rising costs have prompted complaints in Parliament, where lawmakers have demanded explanations for the increase in fuel prices and the depreciation of the shilling.
On October 6, Leader of the Opposition Joel Ssenyonyi warned that the weakening currency was increasing the cost of doing business, particularly for importers who rely on foreign exchange to pay suppliers.
“It is important that government tells us what they are doing about this situation because it is biting hard,” he told Parliament.
Ssenyonyi also questioned why fuel prices remained high despite the Uganda National Oil Company’s role as the country’s sole bulk importer of petroleum products.
“Government said Uganda National Oil Company is the sole importer of bulk petroleum products, and it would stabilise the prices of petroleum products,” he said, adding that the situation needed attention when retail prices became problematic.
Deputy Speaker Thomas Tayebwa subsequently demanded a breakdown of the price at which the state-owned company supplies fuel to oil marketing companies, saying lawmakers wanted to establish how much was being added before the product reached consumers.
The government has attributed the increase to several factors, including the weaker shilling, international supply disruptions and the new fuel excise duty.
Energy Minister Monica Musenero told Parliament that the price increase was “multifactorial”, while defending the role of the state-owned company in cushioning Uganda against international supply shocks.
Some lawmakers have called for temporary tax relief on petroleum products to reduce pressure on consumers.
The falling shilling has also raised concerns among importers about the taxes they will pay on goods bought when the exchange rate was more favourable.
Karim Masaba, a member of parliament representing Mbale City’s Industrial Division, said traders were worried that the Uganda Revenue Authority would calculate taxes using the current exchange rate, even for goods purchased when the dollar was cheaper.
“Some of these goods have just arrived and some others are still in transit. The prayer of these traders is that URA and the Ministry of Finance hold on to the previous rate, because their goods were purchased at the older lower rate,” he said.
The complaints highlight the growing pressure on businesses, which must contend with higher import costs, fuel prices and potentially more expensive credit.
The decision also comes days after President Yoweri Museveni rejected a proposal by the central bank to sell some of its foreign exchange reserves to support the shilling.
“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 said during Uganda’s Independence Day celebrations on 9 October.
He urged Ugandans to reduce their dependence on imported goods and buy more locally produced products, arguing that the country should preserve its foreign currency reserves rather than use them to support the exchange rate.
“Please minimise the imports. This is the answer. Import less, and buy more local goods,” he said.
The President’s position highlights the competing priorities facing policymakers: protecting foreign currency reserves and promoting local production while dealing with the immediate impact of a weaker shilling on the cost of living.
Higher interest rates make it more expensive for commercial banks to borrow money, which can lead to higher interest rates on loans for households and businesses.
This means people with loans could face higher repayments if their banks adjust lending rates, while businesses may find it more expensive to borrow to expand operations, buy equipment or pay day-to-day expenses.
Central banks typically raise interest rates when inflation is expected to rise, in an attempt to discourage borrowing and spending and slow the pace of price increases.
But it is a balancing act, as higher borrowing costs can also discourage investment and weaken economic growth.
Uganda’s annual inflation rose to 4.6% in September, up from 4.1% in August, driven mainly by higher food crop prices and fuel costs, according to the Bank of Uganda.
The central bank is concerned that rising international oil prices and a weaker shilling could push prices higher still.
Conflict in the Middle East has disrupted shipping routes and energy infrastructure, increasing oil prices as well as the cost of transporting and insuring goods.
A weaker shilling also makes imported goods, including fuel, machinery and raw materials, more expensive to buy. Businesses facing higher transport and production costs may pass some of these increases on to consumers.
The Bank of Uganda wants to prevent these initial price increases from spreading throughout the economy and becoming more difficult to control.
In this latest monetary policy statement, the central bank said the rate increase was intended “to contain inflationary pressures, limit second-round effects from higher energy prices and exchange rate depreciation, and anchor inflation expectations around the medium-term target”.
It expects underlying inflation, which excludes some of the more volatile price changes, to average between 5.5% and 6% over the next 12 months. Overall inflation is forecast to reach between 7% and 7.5%.
Both forecasts point to inflation rising above the bank’s medium-term target of 5% for core inflation.
The central bank has also tightened the rules on how much money commercial banks must keep in reserve.
BoU raises cash reserves
Last month, it raised the Cash Reserve Requirement from 11% to 13.5%, requiring banks to hold a larger share of eligible deposits at the central bank rather than have them available for lending.
The Bank of Uganda said the measure was intended “to prevent excess liquidity from becoming a destabilising factor and to strengthen monetary policy transmission”.
Together with the higher benchmark interest rate, the measure is intended to tighten financial conditions and reduce the risk that rising fuel and import costs will translate into persistent price increases.
However, the tighter monetary policy comes as Uganda’s economic growth outlook weakens.
The Bank of Uganda has lowered its growth forecast for the 2026/27 financial year to between 6% and 6.5%, from an earlier projection of 7% to 7.5%.
It estimates that economic growth slowed to 6.4% in the quarter ending September, compared with 6.8% in the quarter ending June, according to official data from the Uganda Bureau of Statistics.
Higher borrowing costs could further weigh on businesses and households by reducing demand for loans, investment and spending.
The combination of expensive credit, high fuel prices and pressure on the shilling could also make it harder for businesses that depend on imported raw materials, machinery and fuel to manage their costs.
For households, the effects could be felt through higher transport fares, more expensive goods and potentially costlier loans. Although higher interest rates may help contain inflation over time, they do not immediately reverse increases in fuel and other prices.
The central bank expects growth to strengthen over the medium term, supported by private investment, exports and developments in the oil sector.
But much will depend on how global energy prices, the exchange rate and domestic food prices evolve in the coming months.
The Bank of Uganda says it will continue monitoring economic developments and take further action if necessary to keep inflation under control.
