Bank of Uganda raises key interest rate as inflation risks mount

The Bank of Uganda (BoU) has raised its Central Bank Rate (CBR) by 2.25 percentage points to 12 per cent, warning that rising global oil prices, pressure on the shilling and higher food prices could push inflation to between seven per cent and 7.5 per cent over the next 12 months.

The decision, announced in a special session by Governor Michael AtingiEgo on October 14, marks a sharp tightening of monetary policy as the central bank moves to contain price pressures arising from escalating conflict in the Middle East.

The increase from 9.75 per cent follows a deterioration in the global economic outlook since the Monetary Policy Committee’s August meeting, with escalating geopolitical tensions disrupting shipping routes and energy infrastructure and pushing up international oil prices.

Atingi-Ego highlighted that these developments had intensified depreciation pressures on the shilling, increased the cost of imports and heightened the risk that higher fuel and transport costs would spread to other goods and services.

“Heightened geopolitical tensions in the Middle East have disrupted key shipping routes and energy infrastructure, contributing to higher global oil prices, elevated freight and insurance costs, and increased uncertainty in international financial markets.

These developments have heightened imported inflation risks and added to exchange rate pressures across emerging and fragile markets, including Uganda. Significant global risk aversion due to heightened uncertainty and rising interest rates in advanced economies has increased the attractiveness of investing abroad relative to investing in Ugandan financial assets,” the governor noted.

Atingi-Ego warned that mounting global economic pressures could push inflation higher in the coming months, citing rising international oil prices, a weakening shilling and the potential impact of El Niño weather conditions on food supplies.

He said escalating geopolitical tensions and tighter global financial conditions had intensified pressure on the shilling, raising the risk that currency depreciation would feed into domestic prices.

“Although core inflation remains below the medium-term target, projections suggest that inflation may rise fairly rapidly in the near term following the sharp exchange rate depreciation.

However, considerable uncertainty surrounds this outlook, particularly with respect to developments in the global economy. The fuel shock seems persistent, and this, combined with exchange rate depreciation and effects of El Niño weather, could cause inflation to be entrenched if monetary policy does not contain these price pressures now,” Atingi Ego warned.

Additionally, headline inflation, which measures the change in the prices of goods and services, the rose to 4.6 per cent in September 2026 from 4.1 per cent in August 2026, driven by higher food crop prices and higher fuel prices due to the onset of the pass-through of the weaker shilling.

Core inflation, though still modest, has risen gradually from three per cent in May 2026 to 3.5 per cent in August 2026 and 3.7 per cent in September 2026. This steady rise indicates that cost pressures are beginning to spread more broadly.

Core inflation is a measurement of the change in the prices of goods and services, less energy, food and utilities.

“Over the 12 months to September 2026, annual average headline and core inflation remained moderate at 3.4 per cent and 3.3 per cent respectively, below the medium-term target of five per cent for core inflation, reflecting the continued effectiveness of monetary policy.

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