Uganda Raises Policy Rate to 10% Amidst Plummeting Shilling

In response to the unprecedented depreciation of the Ugandan shilling, the Bank of Uganda held a special Monetary Policy Committee (MPC) meeting, resulting in an increase in the Central Bank Rate (CBR) to 10%.

Michael Atingi-Ego, the Central Bank Governor, explained in a statement that the risks outlined in the February 2024 monetary policy statement, particularly the declining exchange rate of the shilling, prompted the necessity for a tightened monetary policy.

The value of the Ugandan shilling against the U.S. dollar has been consistently diminishing, reaching a new low in the trading session on Wednesday, March 6, 2024, with rates of Shs. 3,910 and Shs 3,920 for buying and selling, respectively.

This marks a significant decline compared to the shilling’s performance in 2020, reflecting ongoing challenges in maintaining its value against the dollar and indicating potential economic factors.

The shilling’s vulnerability persists, with the Central Bank facing limitations in effective intervention due to insufficient reserves to stabilize the depreciating local currency.

The increase in the Central Bank Rate is a common strategy to combat inflation by making borrowing more expensive, thereby reducing consumer spending and investment to cool down the economy and maintain price stability.

The inflation figures for February 2024 revealed a rise in both headline and core inflation to 3.4%, up from 2.8% and 2.4% in January 2024, respectively.

The Bank of Uganda emphasized that the rise in inflation, coupled with the shilling’s depreciation, could lead to a general increase in prices if not addressed.

In addition to inflation concerns, the exchange rate depreciation since November 2023, exacerbated in February 2024, was attributed to factors such as the outflow of offshore investor funds, strong domestic demand, and seasonal elements.

To counteract potential further depreciation and inflation, the MPC decided to raise the CBR by 50 basis points to 10%. The move aims to strengthen the currency by attracting foreign investors and maintain stability.

Despite the anticipated challenges, economic growth for FY 2023/24 is projected to remain at 6%, but outer-year projections have been adjusted to a range of 5.5% to 6.5%.

Tighter monetary policy may impact growth in the outer years, affecting household incomes and reducing consumer spending and investment. However, positive factors such as the oil sector’s activity and Uganda’s removal from the FATF Grey List could mitigate some negative effects.

In conclusion, the Bank of Uganda highlighted the need for a tighter monetary policy stance to address elevated risks to the inflation outlook. The MPC’s decision reflects the ongoing economic challenges and uncertainties facing Uganda.