Rwanda Central bank raises lending rate to tame inflation

1 month ago 383

The National Bank of Rwanda (BNR) has increased the key repo rate from 5 percent to 6 percent in a bid to tame soaring inflationary pressures, while preserving the purchasing power of consumers.

The key repo rate is the fee at which the central bank lends to commercial banks. The higher the rate, the more it is likely to reduce liquidity in the banking system.

Speaking during the Central Bank’s quarterly monetary policy and financial stability statement, Governor John Rwangombwa, said that the trajectory of the next three months demonstrated relatively high inflationary pressures mainly due to global supply challenges as well as lower domestic agriculture output.

“Globally, the relaxation of Covid-19 related restrictions and economic recovery support measures in place led to excess demand for commodities. Consequently, prices have been increasing for key commodities such as oil, gas, and food.”

The trend, governor Rwangombwa pointed out, was further exacerbated by the Russia-Ukraine crisis, the two major producers of exporters of oil, gas, fertilisers, metals, cereals, and sunflower-seed oils.

On the domestic front, he added, lower domestic food output linked to climate constraints and increased prices of inputs, led to increased food prices.

According to the breakdown, agriculture sector performance declined in the first half, following unfavourable weather conditions and an increase in prices of imported agricultural inputs.

For instance, Season A for the farming year of 2022, food production fell by 1.2 percent, leading to an increase in prices for locally produced foodstuffs.

Like in other countries, the central bank has in the recent past ‘unusually’ increased the key repo rate as it battles to reign in the current inflationary pressures.

The rate has increased from 4.5 percent since February this year.

According to Rwangombwa, Rwanda’s headline inflation is projected to average around 12.1 percent in this year, but he assured that it is set to decelerate towards the 5 percent benchmark in the second half of 2023.

Economy to remain resilient

The financial sector is expected to remain ‘sound and stable’ looking at the fact that the majority of the sectors sit on a strong capital base, Rwangombwa asserted.

He also added that his institution is engaging concerned authorities to be able to limit second round effects from higher imported prices due to global shocks.

“Normally we have the primary inflationary drivers, supply shocks, links to global challenges, and food challenges, which we can’t do much to control.”

He added, “But there is always the risk of economic factors, for instance because there is an increase in food prices, traders also increase cost of their product, and this is something we are working to prevent.”

On several occasions, Rwangombwa asserted, the government intervenes to subsidize some of the products such as fuel.

“We have also seen a subsidy in public transport and that eases inflation. We have also seen government subsidies on fertilisers so all these measures are taken to tame inflation in the medium term,” he said.

Despite the sector’s projection to remain stable, data from the Ministry of Finance and Economic Planning indicates that economic growth is projected to decelerate to 6 percent from 10.9 percent of last year.

External trade continues to recover

Information from BNR indicates that merchandise exports rose by 32.2 percent compared to the same period last year, mainly due to an increase in commodity prices while merchandise imports rose by 24.5 percent.

This further widened Rwanda’s trade deficit by 20.6 percent in the same period last year, especially due to the fact that the increase in exports was less than enough to offset the larger increase in the import bill.

Source Article