The Bank of Uganda (BoU) is increasing the interest rate by one percentage point from 7.5 percent to 8.5 percent to contain rising inflation.
The increase, the highest in more than two years, came following a meeting held by Uganda’s monetary policy committee.
In a statement, the BoU attributed the increase in inflation to rising domestic food crop prices and external cost pressures, including higher global food and energy prices and recurrent global production and distribution challenges.
“While the inflationary pressures are likely to be temporary, the MPC assessed that a markedly higher policy rate is needed to stabilise inflation around the target, the statement read in part.
The BoU noted that core inflation was now expected to be higher at an average of 6.3 percent compared to the previous forecast of 6.1 percent last month while headline inflation is forecast to average 7.4 percent compared to 7.2 percent. Overall, the BoU said that the inflation outlook remained “uncertain”.
“Inflation is expected to peak in the second quarter of 2023 before gradually declining to stabilise around the medium-term target of five percent by mid-2024.”
Uganda’s economy is still expected to grow by between 4.5 and five percent in 2022 and increase by between five and 5.5 percent next year. The BoU said shocks to commodity prices, disruptions to production and distribution chains and global inflation will continue to negatively impact domestic economic growth.
Despite the prevailing situation, the economy is projected to grow by 6.5 to seven percent in the medium-term on the back of public and private investments in the oil sector.