National Bank of Rwanda (BNR) has signaled commercial banks to consider increasing loans issuance after revising downwards the key repo rate from 6.5 per cent to 6.25 per cent.

The key repo is the rate at which the central bank lends money to commercial banks. The rate had remained unchanged at 6.5 per cent since mid-2014.

The development was announced, yesterday, by central bank governor John Rwangombwa following the quarterly Financial Stability Committee and Monetary Policy Review.

Rwangombwa said the committees had found the financial sector to be sound and profitable and able to stand external shocks. They revised the policy rate to further support the financing of the economy by the banking sector.

"In view of the current macroeconomic conditions, the monetary policy committee decided to revise down the policy rate to 6.25 per cent for the first quarter of 2017 from 6.5 per cent to further support the financing of the economy,” he said.

Rwangombwa said the move was aimed at sending a signal to commercial banks operating within the country to consider increasing loans given and at cheaper costs.

However, the central bank governor cautioned that the direct impact of the development may not be immediate in terms of reduction of lending rates or increase in loans issued as there were multiple factors beyond the repo rate.

These other influencing factors, he said, they were working together with banks to align them to the desired effect.

"There is no direct impact expected immediately in terms of the reduction of lending rates. There are many factors that influence the lending rate. There is no model that can try to generate what impact this is likely to have on the lending rate. There are many other factors that we are working with banks to reduce this,” Rwangombwa said.

He added that, at the moment, the central bank remains positive that the signal will have desired effect, adding that forces of demand would also have a huge role towards target impact.

"We cannot also be sure of the exact impact it will have on the increase of loans issued but we remain positive that they will react well. But it also depends on the demand side as well. For example, if you look at the performance of the newly authorised loans, it increased by 4.1 per cent. The demand was quite low,” Rwangombwa said. 

He noted that when the benchmark has been lowered in previous years, it has had an impact, especially on increasing the amount of loans issued.

Bankers speak out

Bankers have, however, adopted a cautiously optimistic attitude toward the development’s intended impact, saying influencing the lending rates and amount of loans requires other factors at play.

Rwanda Bankers Association president Maurice Toroitich said the move shows that the central bank aims at having more investment and production in the economy.

"The general understanding is that when the monetary policy authority cuts interest rates, the implication is keen on having more liquidity injected into the economy to stimulate investment and growth. That is the most standard expectation,” Toroitich told The New Times.

He said the move also showed that the central bank was optimistic about the future inflation trends; that they expect inflation rates are likely to stabilise or come down.

Toroitich, who is also the chief executive of Kenya Commercial Bank Rwanda (KCB-Rwanda), said the policy rate is very different from the market rate, which is determined by the free forces of demand and supply.

"The equilibrium interest rate is determined by demand and supply. The key repo rate is a signal, the way the market will behave will depend largely on the forces of demand. If the equilibrium between supply for credit and demand for credit do not balance, it is unlikely that you see the rate drop faster,” he said.

Other factors that influence the target impact according to the renowned banker include, the structure of liquidity of the market and who has the liquidity in the market, at the moment it is institutional investors such as insurance companies who price according to the market.

Experts say any visible impact is likely to be felt in about 12 months.

Economic growth

The central bank maintained that the country will achieve the 6.0 economic growth targets despite the turbulent global economic times.

Inflation too, Governor Rwangombwa said, would come down to about 6.0 per cent at the end of December from 6.4 per cent in November and about 5.7 per cent in the first quarter of 2017. 

editorial@newtimes.co.rw