The central bank has allayed fears that the Rwandan economy could be heading into a deflation.

"We are not moving towards a deflation...our core inflation, which is linked to the output of the economy, it is still above two per cent. The reduction in headline inflation (normally influenced by fuel and food prices) doesn’t really mean we are facing deflationary pressures,” National Bank of Rwanda’s governor John Rwangombwa said.

This was during the presentation of the monetary policy and financial stability statement for 2014 last week.

Rwangombwa was reacting to fears that have been expressed by some experts, indicating that the economy could be going into deflation with inflation rates heading towards zero.

Year-on-year inflation was at 1.4 per cent in January from 2.1 per cent in December.

Deflation, which is the opposite of inflation, has negative effects on the economy like increased unemployment since it reduces the level of purchasing power, a situation that can lead to the economy to go into a depression.

High inflation is bad for an economy, and so is deflation when it signals underlying economic weakness. A broad and sustained decline in consumer prices can generate a downward spiral of lower spending, job losses and further price cuts. Some economists worry more about deflation because it’s harder to combat with traditional monetary-policy tools.

Meanwhile, Rwanda’s inflation rate averaged 1.8 per cent last year, mainly driven by the decline in food and international oil prices.

Domestic goods inflation declined to 1.9 per cent in 2014 from 4.6 per cent in 2013, while imported inflation stood at 1.5 per cent by the end of the year, down from 2.6 per cent the previous year on falling global oil and food prices; and declining inflationary pressures, especially in the East African Community countries, he added.

Aggregate demand improved progressively over the year as indicated by core inflation, which rose from two per cent in June last year to 2.9 per cent in December. Headline inflation, on the other hand, fluctuated from 1.4 per cent in June, 1.8 per cent in July, 0.9 per cent in August, 0.2 per cent in September, 0.5 per cent in October, 0.7 per cent in November and 2.1 per cent in December last year.

Farmers got good harvests in season A, which led the government to announce an indicative minimum price for maize at Rwf160 per kilo to protect farmers against exploitation by dealers.

BNR expects the falling oil prices to continue to ease pressure on inflation giving more room for an accommodative monetary policy that supports financing of the economy by the banking sector.

ben.gasore@newtimes.co.rw