Rwanda’s central bank lowered its benchmark interest rate for the first time in more than a year, becoming the fourth African nation to cut the rate as inflation is seen easing across the continent.
The monetary policy committee cut the key policy rate by 50 basis points to 7 percent, National Bank of Rwanda Governor, John Rwangombwa told reporter in capital, Kigali May, 29. This is the first cut since 2020 April when the lender lowered the lending rate to 4.5 percent from 5 percent, as the National Bank of Rwanda had taken cumulative rate increase stance then to tame the runaway inflation.
The Rwanda Monetary Policy Committee becomes the four African nation to lower the key lending rate after Ghana, Mozambique and Namibia all citing stabilizing inflation in 2024-2025.
Annual urban inflation in Rwanda quickened to 21.7 percent in November 2022, its highest level in over a decade, as the prices of bread to vegetables surged. It’s also breached the central bank’s target band range of 2 to 8 percent for more than four months.
“In line with the forecasts of stable inflation of around 5 percent over the policy horizon, the Monetary Policy Committee has decided to reduce the central bank rate by 50 basis points to 7.0 percent,” Rwangombwa told reporter.
However, warning the MPC will continue to closely monitor the potential risks that could affect the projected stable inflation path. “Should these risks materialize and impact price stability, appropriate adjustments will be made to maintain inflation within the target band 2 to 8 percent,” He said.
Adding, these projections face risks, including increased global geopolitical tensions and possible adverse weather conditions due to climate change.
In the first quarter of 2024, headline inflation decelerated to 4.7 percent from 8.9 percent in the previous quarter, due to declines in core and fresh foods inflation that offset an increase in energy inflation. The decrease in core inflation was mainly driven by the deceleration of core food inflation, resulting from the downward trend in international prices of key processed food items such as rice, sugar, and corn flour.
According to the Central Bank, this year and 2025, headline inflation is projected to evolve around the medium-term target of 5.0 percent. The expected stable inflation path will be supported by easing food inflation in 2024, reflecting the expected decrease in international food prices as well as the normalization of domestic agricultural production. However, these projections could be affected by risks, such as heightened global geopolitical tensions and adverse weather conditions due to climate change.
Market Interest Rates
In the first quarter of 2024, the interbank rate increased to 8.29 percent from 7.36 percent in the first quarter of 2023, due to tighter monetary policy. During the period, the interest rates on government securities, deposits, and lending also increased. In particular, the average lending rate rose by 38 basis points, from 15.97 percent in the first quarter of 2023 to 16.35 percent in the first quarter of 2024. The increase was particularly noted for short-term loans.
Economic Growth Outlook
In the last quarter of 2023, the economy expanded by 10 percent bringing the overall growth for the year to 8.2 percent. This growth was spurred by the strong performance of the services and industry sectors. The main drivers of growth were tourism, trade, telecommunication, manufacturing, and construction.
This growth trajectory is expected to continue as demonstrated by the performance of high-frequency indicators, including the Composite Index of Economic Activities (CIEA), which grew by 8.6 percent in the first quarter of 2024. This is close to the 8.2 percent recorded in in the fourth quarter of 2023 but lower than the 14.8 percent in first quarter of 2023.
The trade deficit widened by 9.6 percent in the first quarter of 2024 as exports experienced moderate growth of 0.2 percent due to the weak performance of traditional exports, especially coffee, amidst slowing global commodity prices, and decreasing revenues from manufacturing exports, despite strong re-exports. In contrast, imports increased by 5.9 percent, largely driven by high demand for capital goods especially in public transport, and consumer goods, albeit declining import bills for energy and intermediate goods.
The widening of the current account deficit, driven by higher demand for imports to support domestic economic activities and lower receipts from traditional exports, continued to exert pressure on the Rwandan franc, though less than last year. By the end of March 2024, the Rwandan franc had depreciated by 2.08 percent against the US dollar, lower than the 3.07 percent depreciation recorded in the same period last year. Nonetheless, given anticipated private and government inflows this year, gross official reserves are expected to remain adequate, above 4.0 months of imports.
END
