Uganda's central bank has raised its benchmark interest rate by 225 basis points to 12.0% in an emergency policy move aimed at slowing the sharp depreciation of the Ugandan shilling and limiting the risk of rising inflation.

The Bank of Uganda announced the increase on Wednesday following mounting pressure on the local currency, which has weakened against the US dollar amid increased demand for foreign exchange and reduced inflows.

The shilling strengthened by more than 2% against the dollar after the rate hike was announced, according to LSEG data, reflecting an immediate market response to the central bank's decision.

Currency Weakness Raises Inflation Concerns

Bank of Uganda Governor Michael Atingi-Ego said the shilling’s recent depreciation could intensify inflationary pressures, making tighter monetary policy necessary to stabilise the economy.

Although annual inflation stood at 4.6% in September, below the central bank’s medium-term target of 5%, the governor warned that price pressures could accelerate relatively quickly.

A weaker shilling makes imported goods and services more expensive in local currency. This could increase costs for businesses that depend on imported raw materials, machinery, fuel and other essential inputs, with some of those costs potentially passed on to consumers.

The emergency meeting was originally scheduled for November, but the central bank brought forward its decision as pressure on the currency intensified. Atingi-Ego addressed reporters via video conference from Thailand, where he was attending the annual meetings of the International Monetary Fund and the World Bank.

Shilling Down 11% Against the Dollar

The Ugandan shilling has lost approximately 11% of its value against the US dollar since the beginning of 2026, with the decline accelerating over the past six weeks as the currency repeatedly reached record lows.

Traders and the central bank have attributed the pressure partly to rising demand for foreign currency from oil importers, amid elevated global energy prices linked to the Iran war. Reduced foreign-exchange inflows have added to the strain.

Higher demand for dollars increases pressure on the local currency, particularly when foreign-exchange supply is insufficient to meet importers’ needs.

The central bank has so far indicated that it does not intend to intervene directly in the foreign-exchange market to defend the shilling.

Instead, it raised commercial banks’ cash reserve requirement in September in an earlier attempt to support the currency. However, the measure did little to halt the shilling’s decline.

What the Interest Rate Hike Means for Businesses

The increase to 12.0% is intended to help stabilise the currency and contain inflationary risks, but tighter monetary policy could also create challenges for businesses and households.

Higher interest rates can increase borrowing costs, potentially discouraging businesses from taking out loans to finance expansion, purchase equipment or maintain working capital.

For households, more expensive credit could affect consumer spending, while businesses facing higher financing costs may become more cautious about investment and recruitment.

The impact will depend partly on how commercial banks adjust their lending rates, whether the shilling stabilises and how global energy prices and foreign-exchange inflows evolve in the coming weeks.

Source: Reuters

Reporting: Elias Biryabarema, Sfundo Parakozov &Vincent Mumo Nzilani.

Writing: George Obulutsa

Editing: Alexander Winning