Uganda acts to support weakening shilling

The Bank of Uganda convened an emergency monetary policy meeting in response to mounting pressure on the national currency. Following this meeting, the central bank raised its main interest rate by 225 basis points to 12%. The decision marked a sizeable tightening of monetary policy aimed at addressing macroeconomic stress. By increasing the policy rate, authorities sought to make shilling assets more attractive and temper inflationary pressures linked to currency weakness.

The timing and scale of the move underline the urgency with which policymakers viewed developments in the foreign-exchange market. An emergency setting for the meeting suggests that the situation was not left to the regular policy cycle. The new 12% rate became the central reference for short-term borrowing costs in the economy, affecting banks, businesses, and consumers. However, the immediate aftermath showed that rate policy alone did not fully reverse pressures on the shilling.

Despite the substantial rate increase, the Ugandan shilling continued to weaken in the days that followed. Market trading indicated that demand for foreign currency remained strong, while the local unit struggled to gain traction. The persistence of depreciation after such a large rate move highlighted the depth of the challenges in the foreign-exchange market. It also suggested that factors beyond domestic interest rates were influencing currency dynamics.

The ongoing weakness kept attention focused on the effectiveness and sufficiency of monetary policy tools. While higher rates can support a currency by attracting capital and slowing credit growth, they may have a delayed impact when underlying flows are driven by trade or external conditions. The situation placed additional pressure on the central bank to consider complementary measures alongside the policy-rate adjustment.

On October 22, 2026, the Bank of Uganda took an additional step by intervening directly in the foreign-exchange market. In a notice to banks, the central bank said it was in the market selling foreign currency. The amount being sold was not disclosed, but the action signalled an attempt to provide hard-currency liquidity and moderate the pace of shilling depreciation. Such operations typically aim to smooth volatility rather than set a fixed exchange rate level.

By combining a sharp policy-rate hike with direct sales of foreign currency, the central bank deployed two key tools to stabilise the market. The rate increase targeted underlying monetary conditions, while FX intervention addressed immediate imbalances between supply and demand for foreign currency. Together, these steps underscored the authorities’ focus on containing financial stress and limiting further disorderly moves in the exchange rate.

The recent actions highlight the challenges faced by policymakers when currency weakness persists despite conventional tightening. A 225-basis-point increase to a 12% policy rate is a strong signal, yet the shilling’s continued softness showed that confidence and external factors play a central role. Direct FX sales on October 22 represented a more immediate response to market conditions, intended to reassure participants that liquidity would be available.

Looking ahead from these developments, the interplay between interest-rate settings and foreign-exchange operations will likely remain central to Uganda’s policy framework. The episode illustrates how, in periods of stress, central banks may need to employ multiple instruments in quick succession to address volatility. It also underscores that stabilising a currency under pressure can require both tighter monetary conditions and active market engagement.