Why BoU's 12% Rate Decision Deserves Uganda's Support

The Bank of Uganda's decision on 14 October 2026 to raise the Central Bank Rate (CBR) from 9.75% to 12% deserves thoughtful public support. The 225-basis-point increase may make borrowing costlier, but the greater objective is to prevent a temporary external shock from becoming a prolonged domestic economic crisis.

The shilling is more than a figure on a foreign-exchange board. It determines how much Ugandans pay for fuel, medicine, machinery, school supplies and other imported necessities. Protecting its purchasing power is ultimately about protecting households, business margins and national economic confidence.

BoU's latest Monetary Policy Statement offers compelling evidence. Annual headline inflation increased from 4.1% in August to 4.6% in September 2026. More importantly, the Bank projects inflation to average 7–7.5% over the coming twelve months, while core inflation could reach 5.5–6%, above its 5% medium-term target.

The pressures are largely external: geopolitical tensions, higher international oil prices, expensive freight and a weakening shilling. Uganda's current-account deficit has also widened by US$1.4 billion to US$4.6 billion. The widening external gap intensifies pressure on the shilling.

Waiting until inflation becomes entrenched would risk demanding even harsher intervention later. Preventive monetary policy is often less costly than repairing lost confidence.

The CBR is not the rate automatically charged on every bank loan. It is a policy benchmark that influences financial-market rates, bank funding and decisions to borrow, save or invest.

By increasing the CBR, BoU seeks to moderate credit-funded expenditure, including demand for imported goods and the dollars needed to purchase them. Higher returns on shilling-denominated assets may also encourage investors and savers to retain funds in local currency rather than seek foreign-currency alternatives.

Equally significant is the expectations channel. When households and businesses believe inflation will be contained, they are less likely to rush into precautionary dollar purchases or build ever-higher price increases into contracts. Credible policy can therefore ease pressure on the currency before every benefit appears in official statistics.

However, no interest-rate adjustment guarantees a particular exchange rate. Global dollar movements, capital flows and Uganda's export earnings will remain important.

Consider Mary Kevin, a Ugandan trader importing goods worth US$10,000. If the exchange rate moves from an illustrative UGX 3,900 to UGX 4,100 per dollar, the import bill increases by UGX 2 million without the supplier changing the dollar price.

That extra cost can move through wholesale prices, transport charges and ultimately household budgets. A more stable currency reduces such uncertainty, protects real incomes and enables businesses to plan with greater confidence.

Price stability also protects savers and wage earners, who may otherwise see their money purchase less each month. The objective is not to make prices magically fall, but to prevent their rate of increase from accelerating.

The trade-off must be acknowledged. Some banks may raise lending rates, particularly on variable-rate loans. SMEs and households already servicing debt may feel the impact; depositors could benefit from improved savings returns.

For perspective, if a commercial bank passed on the entire 2.25% point increase to a UGX 100 million loan, the additional annual interest would be approximately UGX 2.25 million, assuming an unchanged principal. That is an illustration, not an automatic consequence of the CBR increase.

Some near-term financial discomfort may be justified to preserve predictable currency values and manageable inflation. The burden will not be equally small for everyone. Banks should price credit responsibly, and policymakers must monitor effects on small businesses and employment.

Monetary discipline alone cannot produce oil, grow coffee or earn export dollars. Government must reinforce BoU's efforts through prudent spending, sustainable domestic borrowing, export promotion and investment in energy, agriculture and value-adding industries.

Fiscal indiscipline would work against the central bank by increasing demand and crowding private borrowers out of credit markets. The priority should be efficient expenditure that expands supply and foreign-exchange earnings.

BoU has already revised projected FY2026/27 economic growth to 6 - 6.5%, making careful coordination indispensable.

The choice before Uganda is not between expensive credit and a strong shilling. It is between managing today's adjustment deliberately and risking a more painful inflationary spiral tomorrow.

We should support BoU's resolve, insist on responsible fiscal policy and protect productive enterprises during the transition. A stable shilling is not a luxury for economists; it is a safeguard for every Ugandan's earnings, savings and future.

Sometimes, protecting the economy requires accepting a little discomfort today to avoid a much greater cost tomorrow.

The writer is an International Tax Advisor and a Finance & Economic Policy Analyst