The Bank of Uganda (BoU) has announced its decision to raise interest rates for the second consecutive month, elevating them from 10% to 10.25%.
This marks the highest interest rate level in nearly seven years, underscoring the urgency to address inflationary pressures and stabilize the depreciation of the Ugandan shilling.
Inflationary Trends and Policy Response
Despite a slight decrease in inflation to 3.3% in March, down from 3.4% in February, concerns about inflation persist.
Policymakers emphasize the persistence of elevated inflation risks due to both global factors and ongoing challenges within the domestic economy, necessitating proactive measures to mitigate potential impacts.
BoU’s Projections and Forecast Adjustments
Michael Atingi-Ego, Deputy Governor of the BoU, outlined projections indicating a potential rise in core inflation to a range of 5.5% to 6% over the next year.
However, forecasts anticipate a return to the 5% target by the second half of 2025. Adjustments to forecasts reflect considerations such as exchange rate stability, supply-side shocks, and global inflationary trends.
Shoring up the Ugandan Shilling
The interest rate hike is expected to contribute to efforts aimed at bolstering the Ugandan shilling, which has experienced significant depreciation since February.
Atingi-Ego attributes the shilling’s decline to factors such as the withdrawal of foreign investments seeking higher yields elsewhere.
Despite central bank interventions, the shilling has depreciated by 4%, signaling ongoing challenges.
Economic Growth Forecast and Macroeconomic Environment
Despite prevailing economic challenges, the BoU maintains a growth forecast of 6% for Uganda’s economy in the current fiscal year ending in June.
This projection underscores resilience amid a challenging macroeconomic environment, emphasizing the importance of proactive measures to sustain economic stability and growth.