The National Bank of Rwanda (BNR) has raised the policy rate from 5% to 6% in a bid to stem rising inflationary pressures, while preserving consumers’ purchasing power.
The policy repo rate is the fee at which the central bank lends to commercial banks. The higher the rate, the more likely it is to reduce the liquidity of the banking system.
Speaking at the Central Bank’s Quarterly Monetary Policy and Financial Stability Statement, Governor John Rwangombwa said the trajectory over the next three months has demonstrated relatively high inflationary pressures, mainly due to global supply issues. as well as the decline in national agricultural production.
“Overall, the easing of Covid-19 restrictions and the economic recovery support measures in place have led to excess demand for commodities. As a result, prices have increased for commodities such as oil, gas and food.
The trend, Governor Rwangombwa pointed out, has been further exacerbated by the Russian-Ukrainian crisis, the two main exporting producers of oil, gas, fertilizers, metals, cereals and sunflower oils.
On the domestic front, he added, the decline in domestic food production linked to climatic constraints and rising input prices has resulted in higher food prices.
According to the breakdown, the performance of the agricultural sector declined in the first half of the year, following unfavorable weather conditions and an increase in the prices of imported agricultural inputs.
For example, for season A of the agricultural year 2022, food production fell by 1.2%, leading to an increase in the prices of locally produced foodstuffs.
As in other countries, the central bank recently “unusually” raised the key repo rate as it struggles to rein in current inflationary pressures.
The rate has increased by 4.5% since February this year.
According to Rwangombwa, Rwanda’s headline inflation is expected to average around 12.1% this year, but he assured that it is expected to slow towards the benchmark of 5% in the second half of 2023.
The economy must remain resilient
The financial sector should remain “healthy and stable” given that the majority of sectors are based on a solid capital base, Rwangombwa said.
He also added that his institution urged the authorities concerned to be able to limit the second-round effects of the increase in imported prices due to global shocks.
“Normally we have the main 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 example because there is an increase in food prices, traders also increase the cost of their product, and that is something we we are trying to prevent”.
On several occasions, Rwangombwa said, the government intervenes to subsidize certain products such as fuel.
“We have also seen a subsidy in public transport and that is mitigating inflation. We have also seen government subsidies on fertilizers, so all these measures are taken to keep inflation under control in the medium term,” he said.
Despite industry forecasts expected to remain flat, data from the Ministry of Finance and Economic Planning indicates that economic growth is expected to slow to 6% from 10.9% last year.
Foreign trade continues to recover
BNR information indicates that exports of goods increased by 32.2% compared to the same period last year, mainly due to an increase in commodity prices, while imports of goods increased. increased by 24.5%.
This further widened Rwanda’s trade deficit by 20.6% over the same period last year, partly due to the fact that the increase in exports was less than enough to offset the larger increase in the bill. imports.