The central bank has cut its lending rate to commercial banks from 7 per cent to 6.5 per cent to encourage more lending to the private sector and shore up economic growth.

The move is seen as a signal to commercial banks to consider reducing interest rates on commercial loans and allow more access to credit by the fast-growing private sector. 

This would translate into increased investment in productive sectors, hence accelerating the country’s economic growth, economists say.

The reduction in the repo rate comes shortly after new figures released by the National Institute of Statistics of Rwanda show the economy returning to a faster growth trajectory, posting a 7.4 per cent growth rate during the first quarter of the year.

John Rwangombwa, the governor of the National Bank of Rwanda (BNR), said this necessitated further easing of the monetary policy stance to allow more money into the private sector and sustain economic recovery.

The decision was arrived at during the ordinary meeting of the Monetary Policy Committee (MPC) and the Financial Stability Committee (FSC) of BNR that noted that the financial sector remains buoyant with a strong capital base, low inflation, favourable liquidity levels as well as improved asset quality and profitability.

"In view of these key developments and economic outlook and financial fundamentals both at national and international level, the MPC noted the need to further ease the monetary policy stance to continue sustaining economic recovery,” Rwangombwa said.

However, he added, the central bank would continue to "closely monitor efficiency in the financial sector” by strengthening its supervisory function and implementing necessary reforms in pension, insurance, banking and microfinance institutions. 

The aim, he said, is to build a more dynamic financial market that can support private sector growth.

BNR figures show growth in lending to the private sector with new authorised loans up by 46 per  cent during the first five months of the year compared to a 13.7 per cent contraction during the same period last year. 

Banks signed up new loans worth Rwf270 billion. Overall, outstanding credit to the private sector increased by 8 per cent between December 2013 and May, compared to 4 per cent rise in the same period in 2013.

BNR said there are already signs of falling lending rates with treasury bills rate down to 5.92 per cent as of May 2014, from 10.8 per cent in June 2013.

The lending rate for most commercial banks declined from 17.65 per cent in June last year, to 17.23 per cent in May.

This means that more credit is going to the private sector to support investment, BNR chief economist Thomas Kigabo, said.

Credit to the private sector is projected to continue increasing this financial year.

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Florin Rwiranga, head of Treasury Unit at Access Bank, said the reduction in the repo rate would not only benefit clients, but also strengthen the banking industry.

"Low interest rates could mean that commercial banks will prefer to lend more credit to the private sector instead of investing in government treasury bonds. This will translate into increased private investments and drive the country’s economic growth,” Rwiranga said.

Sanjeev Anand , the chairperson of Rwanda Bankers Association, described the reduction as a signal that government is keen to create a strong economy that is private sector-driven.

"The overall picture is positive and could be made more impressive if the reversed rate is also reflected on deposit rates and non-performing loans,” Annand, also the managing director of I&M Bank Rwanda, said.

The economy continues to recover from the 2013 slowdown with good performance by the industrial sector that expanded at 9 per cent, service sector 8 per cent and agriculture 5 per cent during the first quarter of 2013.

Economists at BNR are projecting a more resounding economic recovery during the second quarter, owing to stable economic conditions at home and globally underpinned by low inflation, stable commodity prices and the general rebound in the global economy.