The Bank of Uganda has decided to holds rates steady, maintaining its Central Bank Rate at 9.5%. This decision comes despite falling inflation and a strengthening national currency. The rate has remained unchanged since August 2023, defying market expectations for a cut. The Monetary Policy Committee stated the current stance remains appropriate to support economic activity. It also aims to ensure inflation stays close to its medium-term target. Consequently, the central bank prioritizes caution over reacting to short-term positive indicators, citing persistent global uncertainty.
Governor Michael Atingi-Ego acknowledged that inflation remains below the 5% target. He credited prudent monetary policy, fiscal coordination, and a stable exchange rate for this control. However, the committee sees significant external risks on the horizon. These include potential global economic shocks and climate change impacts. Therefore, the bank chooses to holds rates at their current level as a preemptive measure. This conservative approach aims to anchor economic stability against future volatility.
Inflation Trends and the Revised Outlook
Recent inflation data shows a slight uptick. Headline inflation rose to 3.2% in January 2026 from 3.1% in December. This increase stemmed from higher prices in some core components. However, lower food crop inflation partly offset this rise. Core inflation also increased to 3.3%, driven largely by services inflation. Passenger air transport costs contributed significantly to this rise. Despite these minor increases, the overall inflation outlook has been revised slightly downward.
The revision reflects the modest appreciation of the Ugandan shilling. It also accounts for lower international oil and food prices. Projections now indicate inflation will remain below target in 2026. It should range between 3.8% and 4.3%. The forecast expects stabilization around the target over the medium to long term. This benign outlook typically creates space for rate cuts. Nonetheless, the central bank’s decision to holds rates highlights its risk-averse strategy in an unpredictable global environment.
The Surprising Strength of the Uganda Shilling
The performance of the Uganda shilling has surprised many observers. It remained strong against the US dollar even during the recent election period. Deputy Governor Augustus Nuwagaba attributed this strength to a favourable investment climate. Sustained investor confidence drove inflows into government securities like bonds. These inflows provided crucial support for the currency. Additionally, foreign exchange earnings from exports continued to rise. Key sectors include coffee, cocoa, tourism, and labour remittances.
Governor Atingi-Ego contrasted the current stability with past pressures. In 2022, high interest rates prompted many foreign investors to exit. This exodus weakened the shilling considerably. The recent return of investors, supported by market stability and growth, has revived the foreign exchange market. As a result, Foreign Direct Investment climbed to USD 3.5 billion. This robust currency performance gives the central bank more policy flexibility. Yet, it still chooses to holds rates, valuing stability over stimulating borrowing.
Balancing Domestic Growth and External Risks
The central bank’s primary mandate is price stability, but it must also consider growth. By choosing to holds rates, it implicitly judges that the current rate supports activity adequately. Lower rates could spur more borrowing and investment in the short term. However, they might also overheat the economy or weaken the shilling if global conditions sour. The bank’s statement emphasizes ensuring inflation stays on target in the medium to long term. This forward-looking view justifies the cautious stance.
Global risks cited include geopolitical tensions and volatile commodity markets. Climate change also poses a direct threat to agricultural output and food prices. For an import-dependent economy, these external factors are critical. A preemptive hold on rates builds a buffer against such shocks. It signals to markets that the Bank of Uganda will not jeopardize hard-won stability for marginal growth gains. This credibility is itself a valuable economic asset.
Market Reactions and Future Policy Direction
Financial markets will likely interpret this hold as a sign of unwavering caution. Businesses and consumers hoping for cheaper credit will face continued high borrowing costs. The decision underscores the bank’s data-dependent but risk-sensitive approach. Future meetings will closely scrutinize both domestic inflation and global risk indicators. A significant easing of global uncertainty or a domestic slowdown could prompt a reevaluation.
For now, the message is clear: stability is paramount. The Bank of Uganda holds rates to maintain its defensive position. It will await more conclusive evidence that the global environment has stabilized. This patience aims to secure Uganda’s economic gains against potential future storms. The coming months will test whether this conservative strategy optimally balances growth and stability in a rapidly changing world.
