Inflation: Bank of Uganda raises CBR again
Atingi-Ego, the Acting BoU Governor
For the second month in a row, the Bank of Uganda has raised its key rate, the central bank rate (CBR) in a bold move to combat inflation.
Michael Etingi-Ego, the acting BoU governor, told journalists at a briefing that the decision to raise the CBR once again to 10.25% from 10% was made based on the assessment that while inflation was declining, there were still significant risks and uncertainty.
The CBR, primarily an interest rate, is a tool used by the Central bank to stabilize prices in the economy by influencing the pricing of financial assets in the economy including Treasury bond rates, mortgages and other loans.
- By tinkering with with the CBR, the Central bank influences the interest rates charged by commercial banks, which in turn affects the amount lent out and thus money in circulation in the economy.
Generally, the CBR therefore plays a pivotal role in shaping economic activity, controlling inflation, and maintaining financial stability within an economy.
For example, the BoU primarily uses the CBR to keep the annual inflation rate around a target of 5%.
- Atingi-Ego said raising the rate was necessary to anchor inflation around the target level while supporting economic stability to encourage saving, investment, economic growth, competitiveness.
Last month, BoU raised the CBR by 50 basis points to 10% for the first time since December 2023, in response to the Shilling falling to an all-time low of UGX3,955 to the U.S Dollar in the week of February.
This depreciation was reportedly due to a strong dollar demand from the energy and manufacturing sectors and the reported outflow of offshore funds from the local market for higher yields in competing markets abroad.
However, the depreciation pressure on the local currency has since eased slightly but it is still below the monthly average exchange rate of UGX 3,745 to the USD that was recorded at the same time last year.
Atingi-Ego admitted that "the evolution of inflation remains a challenge" but that last month's increase in the CBR had a spillover effect of stabilising the exchange rate but that the local currency continues to remain vulnerable to the outflows of investor funds to other markets, which he said significantly impacts domestic prices.
- Atingi-Ego warned that short-term projections indicate that inflation could rise to between 5.5% - 6% in the next 12 months, thus dampening household incomes and consumer spending.
- The return to the medium term average of 5% is not expected until the second half of next year, according to the BoU chief.
However, economic analysts will look at this as a tall order given that the country will by then be entering a new election cycle ahead of the general elections in early 2026, which traditionally poses a serious challenge to the BoU because of excess liquidity in the economy as politicians unleash the cash.
However, Atingi-Ego insisted that the increase in the CBR 'as a prudent measure' to address the heightened inflation risks, adding: "This monetary stance is necessary to balance the need to contain inflation while supporting sustainable, which is essential for Uganda's social economic transformation."