The Bank of Uganda raised its benchmark interest rate by 225 basis points to 12% at an emergency meeting on October 14, seeking to contain inflationary pressures intensified by the shilling’s sharp depreciation and rising import costs.

The shilling strengthened by more than 2% after the decision, according to LSEG data cited by Reuters.

The Monetary Policy Committee increased the Central Bank Rate from 9.75%, where it had been held since October 2024, after the currency breached UGX4,000 to the dollar on October 5 and continued falling to successive record lows. The shilling opened at UGX4,152.86 against the dollar on October 13, according to central bank data.

Bank of Uganda Governor Michael Atingi-Ego said the currency’s depreciation and deteriorating external accounts threatened to amplify inflation, requiring a tighter monetary policy stance. The central bank cited rising global oil prices, stronger demand for foreign currency from fuel importers and offshore investors withdrawing funds from government bonds.

The bank raised its forecast for headline inflation to 7%-7.5% over the next 12 months, while projecting core inflation of 5.5%-6%, above its medium-term core inflation target of 5%. Higher fuel and import costs are expected to spread more widely through the economy.

Uganda’s annual headline inflation rose to 4.6% in September from 4.1% in August, according to the Uganda Bureau of Statistics. Food crop and related items inflation more than doubled to 4.5% from 2.1%, while core inflation increased to 3.7% from 3.5%.

The shilling has lost approximately 12% against the dollar since the beginning of 2026. Traders and market analysts have attributed its decline to increased dollar demand from fuel importers and other businesses, alongside foreign investors reducing their exposure to Ugandan government securities.

Citigroup estimated that approximately $200mn had flowed out of Uganda’s financial markets over two weeks, according to Uganda Business News on October 13.

Stephen Kaboyo, managing director of Alpha Capital Partners, told Reuters on October 8 that he expected renewed pressure on the shilling as businesses stockpiled dollars ahead of peak year-end import demand, compounded by high energy prices.

The central bank has maintained that it does not target a particular exchange rate, although it says it may intervene to smooth excessive market volatility.

The tightening follows President Yoweri Museveni’s statement on October 9 that he had blocked a central bank proposal to sell dollars from the reserves to support the shilling, arguing that a weaker currency benefits exporters. “I am totally against the Governor Bank of Uganda’s proposal to squander our reserves,” Museveni said, according to the Daily Monitor.

The Bank of Uganda also lowered its economic growth forecast for the 2026/27 financial year to 6%-6.5%, from an earlier projection of 7%-7.5%, citing higher energy costs, tighter financial conditions and uncertainty in international markets.

Uganda’s foreign exchange reserves increased by 56% to $6.7bn at end-June 2026, from $4.3bn a year earlier, Reuters reported on October 13, citing central bank figures. The June stock provided 3.7 months of import cover, below the bank’s four-month target. More recent central bank data put reserves at $6.52bn at end-August, equivalent to 3.6 months of imports excluding oil-project goods, according to Uganda Business News.

The emergency rate increase follows the bank’s decision to raise commercial banks’ cash reserve requirement from 11% to 13.5%, effective September 24, as authorities seek to contain liquidity and ease pressure on prices and the currency.