In business, uncertainty can be more expensive than borrowing. A manufacturer may negotiate favorable prices with an overseas supplier, only to discover that a weakening currency has wiped out the anticipated profit before the goods reach Uganda. For an economy heavily dependent on imported fuel, machinery and industrial inputs, exchange-rate instability is not merely a financial-market concern. It is a direct threat to production, investment and household purchasing power.
It is against this background that the Bank of Uganda’s decision to increase the Central Bank Rate (CBR) from 9.75% to 12% on 14 October 2026 deserves careful consideration and public support.
Although the 225-basis-point adjustment introduces short-term financing challenges, its broader purpose is to contain inflation, moderate depreciation pressures and protect economic stability.
Central banks must often make decisions based on where economic conditions are heading rather than where they stand today.
Uganda’s annual headline inflation increased from 4.1% in August to 4.6% in September 2026. More concerning, BoU projects average headline inflation of 7–7.5% over the coming twelve months, while core inflation could reach 5.5–6%, exceeding its 5% medium-term target.
These projections reflect growing external pressures, including geopolitical tensions, increasing international oil prices, higher freight costs and depreciation of the shilling.
Furthermore, Uganda’s current-account deficit has widened by US$1.4 billion to US$4.6 billion, indicating increasing pressure on the country’s external payments position.
In monetary economics, delaying corrective action can allow inflation expectations to become entrenched, eventually requiring more aggressive intervention.
BoU’s decision is therefore not simply a reaction to current inflation; it is a preventive strategy against potentially greater economic instability.
Increasing the CBR influences financial conditions through several economic transmission channels.
First, higher policy rates can moderate excessive borrowing and consumption, reducing demand for imported products and the foreign currency required to purchase them.
Second, improved returns on shilling-denominated financial assets may encourage domestic saving and make local investments relatively more attractive.
Third, decisive action strengthens confidence in the central bank’s commitment to price stability, potentially discouraging speculative foreign-currency demand.
Together, these mechanisms can reduce depreciation pressures and help stabilise inflation expectations.
However, the CBR does not directly determine commercial bank lending rates, nor does an increase guarantee immediate currency appreciation. Exchange rates remain influenced by trade flows, investor sentiment and international market developments.
The objective is a more predictable monetary environment, not an artificially fixed exchange rate.
Consider Augustine, a Kampala-based businessman importing industrial equipment worth US$25,000.
At an illustrative exchange rate of UGX 3,900 per dollar, his import costs UGX 97.5 million. Should the shilling depreciate to UGX 4,100, the same equipment costs UGX 102.5 million.
Augustine loses UGX 5 million in purchasing power without any increase in the supplier’s dollar price.
Now imagine this happening repeatedly across manufacturers, pharmaceutical importers, construction companies and fuel distributors.
The additional costs eventually enter domestic selling prices, affecting consumers and reducing businesses’ competitiveness.
If tighter monetary policy helps contain exchange-rate volatility, businesses such as Augustine’s gain greater certainty when negotiating contracts, preparing budgets and projecting cash flows.
Currency stability is therefore not only a monetary achievement; it is an important foundation for commercial predictability.
Higher interest rates are not without consequences.
Commercial banks may gradually increase lending rates, raising financing costs for SMEs, manufacturers and households with variable-rate loans. Investment decisions may consequently be postponed.
Nevertheless, the alternative could be more damaging.
Unchecked depreciation and persistent inflation erode real wages, weaken savings, increase import costs and undermine investor confidence.
The important distinction is between temporary financing pressures and sustained deterioration in purchasing power.
Ugandans should therefore appreciate the economic reasoning behind this adjustment while expecting policymakers to limit unnecessary hardship.
Banks should avoid unjustified lending-rate increases, while government must safeguard productive investment and employment.
A measured sacrifice today may prevent a much more expensive economic correction tomorrow.
The success of BoU’s intervention will depend partly on government’s fiscal response.
Excessive public borrowing, inefficient expenditure and weak domestic production could undermine the benefits of tighter monetary policy.
Government must therefore prioritize fiscal discipline, export competitiveness, agricultural productivity, industrialization and investments that strengthen foreign-exchange earnings.
Uganda must ultimately produce and export more to create sustainable support for its currency.
BoU has revised projected economic growth for FY2026/27 from 7–7.5% to 6–6.5%, highlighting the importance of balancing stabilization with economic expansion.
Monetary policy can restrain inflationary pressures, but lasting economic resilience requires coordinated fiscal and structural reforms.
Uganda’s interest-rate adjustment should not be interpreted merely as an increase in borrowing costs. It represents an attempt to safeguard macroeconomic stability against increasingly difficult external conditions.
The benefits may take time to materialize, and their magnitude will depend on both domestic policy coordination and global developments.
Nevertheless, protecting confidence in the shilling remains central to preserving business profitability, household incomes and investment certainty.
Ugandans should support this difficult but economically defensible decision, recognizing that the temporary cost of monetary discipline may be considerably smaller than the long-term price of uncontrolled inflation and currency instability.
A country cannot build lasting prosperity on an unstable currency. Protecting the shilling today is part of protecting Uganda’s economic future.
