Uganda bond yields may benefit from policy stability
Uganda’s central bank kept its policy rate at 9.75% as inflation hovers ~6.7% and MTN Uganda reports profit recovery. Investors should watch 10-year yields and private sector credit growth to assess sustained momentum.
The Bank of Uganda’s decision to maintain the policy rate at 9.75% reflects a calibrated balance between mounting inflation pressures and nascent signs of corporate profit recovery, such as earnings rebounds at large, bellwether firms like MTN Uganda. Real GDP growth is projected robustly at approximately 5.0% for 2025, while inflation remains moderately elevated at ~6.7% year-on-year (y/y) and the current account deficit stands at ~4% of GDP. This policy posture is indicative of a central bank attempting to manage a complex dual mandate.
The core mechanism here involves giving the economy essential breathing space. By holding rates steady, the central bank signals sustained confidence in the current inflation anchoring mechanisms while simultaneously preserving critical credit support necessary for the ongoing recovery in the private sector. The pause reduces policy uncertainty, which is highly valued by businesses.
For specific sectors, the outlook is that banks and corporates, having absorbed previous shocks, will see improved earnings trajectories. This stability may significantly increase risk appetite for Uganda’s local-currency assets.
In fixed income markets, the steady policy rate reduces the likelihood of surprise hikes in the short term, thus lowering term-premia and potentially reducing yields on Treasury bonds; the 10-year yield is currently around ~12.5% and may tighten further on continued stability.
However, forward risks are concentrated around external vulnerability and inflation persistence. Uganda’s external debt, while manageable at ~26% of GDP, is largely dollar-denominated, making the country vulnerable to potential exchange-rate shocks . Additionally, inflation could rapidly resurge if adverse weather conditions weaken agricultural output—a major component of the CPI basket—or if the cost of imports rises unexpectedly due to global supply chain disruptions.
Institutional investors should closely monitor two key metrics for the durability of this policy pause: the 3-month Treasury bill yield (where the target is ideally less than 11%) and quarterly growth in private sector credit (with a necessary target of greater than 10%).
If inflation exceeds 8% or the current account deficit widens structurally above 5% of GDP by mid-2026, the central bank’s hand may be forced. In such a scenario, rate hikes may be required, and bond yields could rise sharply by 50–70 basis points (bps), reversing the current positive sentiment and raising refinancing costs across the economy.
