Central bank unlikely to revise key repo in February

Tuesday, January 28, 2020

Collins Mwai

An artistic impression the proposed international airport in Bugesera District. The resuming of the construction works on the airport is expected to reflect on the national economy. According to government, the airport will upon completion of the first phase expected in 2022, have the capacity to accommodate up to seven million passengers annually. File

The central bank is unlikely to reduce the Key Repo rate in February when the Monetary Policy Committee holds its first meeting for the year.

The key repo rate is the maximum rate at which commercial banks invest their money with the central bank.

A lower rate means that it’s more profitable for banks to lend to the private sector than invest with the central bank.

The policy rate currently stands at 5 percent, reduced from 5.5 percent in May 2019 against the background of persistently low inflation of 2018 and early 2019.

World Bank officials say that going by the trends inflation which stood as 6.9 per cent as of November 2019 which is outside the Central Bank’s threshold of 5 per cent.

In the latest release of the Rwanda Economic Update, the World Bank said that while sustained inflation in the period before the last quarter of 2019 enabled the Central Bank to lower the repo rate to enable more lending to the private sector.

"Sustained low inflation in 2017-2019 enabled the Central Bank to lower the policy rate but the situation has rapidly changed…however, with the rapid reversal in inflation, the space for the monetary policy has narrowed. The quarterly Monetary Policy Committee (MPC), convened in November, maintained the policy rate at 5 percent,” the World Bank report noted.

The reduction on policy rate by the Central Bank saw an increase in lending as well as a reduction in the cost of loans by Rwandan commercial banks to 16.47 per cent in the first three quarters of 2019 from 17.07 per cent in 2018.

Aghassi Mkrtchyan an economist at the bank said that credit to the private sector had gone up, reflecting the strong economic activity.

"As of September 2019, credit growth accelerated to 20.6 percent, y-o-y, more than double the growth in 2017–18. Approved loans increased 41.1 per cent in the first three quarters of 2019, compared to almost zero growth in new loans in the same period of 2018. Commerce and hospitality sectors received 27.5 per cent of the new loans, while construction-related activities, i.e. public works and building received 23.8 percent,”

"In terms of growth rates, manufacturing sector experienced the highest growth in bank lending, 173.7 per cent, and saw its share in banks’ portfolio of new loans rising from 5.2 per cent as of September 2018 to 14.1 per cent as of September 2019,” the update report read in part.

Commenting on the anticipated economic growth, Mkrtchyan said that economic growth could accelerate to more than 10 per cent in 2020 if construction of a planned $1.3 billion airport commences.

Economic growth for 2020 is projected at 8 per cent but could be higher driven by infrastructure projects.

"Growth is expected in double digits if works on Bugesera airport gets underway this year or next year, but medium-term growth remains strong,” he said.

Among the risks that could stand in the way for growth include weather-related risks, such as the droughts and floods that can depress agricultural production as well as external risks such as severe slowdown depress prices for the commodities Rwanda exports.