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Uganda’s central bank, the Bank of Uganda (BoU), has taken decisive action by increasing its key interest rate by 50 basis points to 10% in response to the local shilling currency hitting an unprecedented low.
This decision comes after three consecutive meetings where the rate remained unchanged, underscoring the urgency prompted by the currency’s significant depreciation. The Ugandan shilling has experienced a decline of approximately 3% against the US dollar since the beginning of the year, reaching a record low of 3,955/3,965 to the US currency on February 26 before experiencing a slight recovery in recent sessions.
According to BoU Deputy Governor Michael Atingi-Ego, the depreciation of the shilling can be attributed in part to offshore investors withdrawing funds from Uganda in search of higher yields elsewhere. Additionally, the central bank has revised its inflation forecasts for the upcoming 12 months, indicating growing concerns about inflationary pressures.
Core inflation rose to 3.4% in February from 2.4% in January, edging closer to the bank’s medium-term target of 5%. Despite maintaining a growth forecast of 6% for the fiscal year ending in June, the central bank has adjusted forecasts for future years due to tighter monetary policy measures.
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Uganda’s economy has demonstrated resilience compared to many African counterparts, benefiting from favorable weather conditions and increased agricultural output. Additionally, investments in the oil sector, as Uganda prepares for commercial crude oil production in 2025, have supported economic growth.
Atingi-Ego highlighted potential catalysts for improved economic outlook, including strengthening activity in the oil sector and Uganda’s removal from the Financial Action Task Force’s (FATF) “grey list” of countries subject to enhanced scrutiny. These developments could attract foreign direct investment inflows and mitigate risks to the country’s economic trajectory.
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