A Bank of Uganda special Monetary Policy Committee (MPC) meeting has increased the Central Bank Rate (CBR) to 10 percent, up from 9.5 percent announced in February.

The Central Bank’s Deputy Governor, Michael Atingi-Ego, said the decision to increase the CBR was informed by the depreciation of the Shilling.

Rising inflation

Both headline and core inflation rose to 3.4 percent from 2.8 percent in February and 2.4 percent in January respectively.

Whereas the main contributors to the rise in inflation are services and energy fuel and utilities (EFU), this, combined with the Shilling depreciation, could spill over into a generalized price increase if not contained, Atingi-Ego stated in a statement.

“The exchange rate depreciation since November 2023, with sharp depreciation in February 2024, was in part caused by the outflow of some offshore investor funds from the domestic market pursuing more attractive yields available in other markets, strong domestic demand partly as a hedging mechanism against further depreciation, and seasonal factors,” the Central Bank explained.

Central Bank warning

The Bank of Uganda warned that further rate depreciation could drive inflation above the medium-term target of 5 percent by the second half of 2024. It further explained that the inflation trajectory, going forward, would be shaped by the outlook of the Shilling and the other goods inflation.

“Risks to the inflation outlook remain highly dependent on the global and domestic environment. Specifically, high global commodity prices due to geopolitical tensions and an increase in shipping costs resulting from the Middle East conflicts as well as tighter global financial market conditions could result in higher domestic inflation. [The] MPC assessed the risks and the uncertainties of the outlook as being broadly on the upside,” Atingi-Ego revealed.