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The Bank of Uganda (BOU) has announced a hike in the Central Bank Rate (CBR) to 10.25% from 10%, a measure the regulator says will respond to concerns about rising inflationary pressures and the local currency weakness.

Speaking to journalists during the release of the April Monetary Policy statement at BOU headquarters in Kampala, the deputy governor Michael Atingi-Ego said monetary policy tightening was necessary to further stabilise inflation around the medium-term target of 5%.

“The evolution of inflation remains challenging, influenced by factors such as the shilling exchange rate, supply-side shocks, global inflation, and domestic food supply,” he said.

“The recent CBR increase has had a spillover effect of stabilizing the shilling exchange rate. However, the shilling remains vulnerable due to outflows of short-term foreign investor funds from the domestic market in search of attractive yields in other markets and strong domestic demand by corporates.”

The 10.25% hike is the highest CBR since June 2017 according to BOU data. The interest rate charged by the central bank influences the cost of borrowing.

This means that if the CBR increases, commercial banks face higher costs when borrowing from the central bank, which in turn can lead to an increase in the rates they charge to customers. The prime lending rate averaged at about 19% in 2023.

Inflation indicators from the Uganda Bureau of Statistics for March 2024 reveal a marginal decline in headline inflation to 3.3% from 3.4% in February 2024. This decrease is primarily attributed to the reduction in food crop inflation, which declined to -0.4% from 0.5%.