Uganda Central Bank Starts Selling Dollars After Rate Hike Fails to Lift Shilling

Uganda's central bank has stepped into the foreign exchange market to sell dollars in support of the shilling, after a sharp interest rate increase failed to stop the currency's losses against the US dollar. According to Ukumbi Afrika, the Bank of Uganda (BoU) told commercial banks on Thursday that it was selling foreign currency, without saying how much.

Contents

01

A Notice to Banks, Not a Number

02

The Rate Rise That Came First

03

Why Reserves and Credibility Matter for USD/UGX

A Notice to Banks, Not a Number

The central bank's message to lenders was brief. "BOU (The Bank of Uganda) is in the FX market on the sell side," it said in the notice, which carried no further details. In plain terms, the central bank was telling banks it had dollars to sell, a signal meant to steady a market where the shilling has been under sustained pressure in recent weeks and has repeatedly hit record lows against the US dollar.

For readers new to foreign exchange, the shilling's slide shows up in the USD/UGX pair, which tracks how many Ugandan shillings are needed to buy one US dollar. When that number rises, the shilling is weaker. A central bank selling dollars from its reserves adds supply to the market, which can slow a decline, though it does not by itself change the underlying demand for dollars.

The size of Thursday's sale was not disclosed, so the intervention's scale relative to the market cannot be measured from the notice alone. What the notice does establish is direction: the Bank of Uganda is a seller of foreign currency, not a buyer.

The Rate Rise That Came First

The intervention follows an emergency monetary policy meeting at which the central bank raised its benchmark interest rate by 225 basis points to 12%. A basis point is one hundredth of a percentage point, so the move lifted the policy rate by 2.25 percentage points. The Bank of Uganda said the increase was aimed at curbing the currency's decline and stabilising the foreign exchange market.

Higher interest rates are the textbook first line of defence for a weakening currency. They can make local-currency assets more attractive to foreign investors and support the currency without the central bank spending reserves. The shilling did recover some ground after the increase was announced, but it then resumed its downward trend.

The currency is now trading weaker than it was when the central bank raised rates, which is why policymakers turned to selling dollars. The latest intervention signals further efforts by the Bank of Uganda to ease pressure on the currency as market losses persist despite tighter monetary policy.

Why Reserves and Credibility Matter for USD/UGX

Selling dollars draws on a central bank's foreign exchange reserves, the stock of foreign currency it holds. Because reserves are finite, repeated interventions can raise questions about how long a central bank can keep supplying dollars, and traders watch reserve levels and the credibility of policy for clues about where USD/UGX might go next. The Bank of Uganda has not indicated how long it intends to stay in the market on the sell side.

The sequence in Uganda, a rate rise followed by direct currency sales, is a live example of how the two tools interact. Rate policy works through incentives and can take time to feed through, while intervention works immediately by adding dollar supply. Using both together is common when a currency keeps falling despite tighter policy, but neither tool is a guarantee of a lasting reversal.

For ordinary readers following the story, the key facts are these: the benchmark rate now stands at 12% after a 225 basis point increase decided at an emergency meeting, the shilling is weaker than before that decision, and the central bank has confirmed it is selling foreign currency to commercial banks without disclosing the amount. The report was written by Vincent Mumo Nzilani and George Obulutsa and edited by Aidan Lewis and Alexander Winning.