The Governor of the National Bank of Rwanda (BNR), John Rwangombwa, has said that when the bank raises its lending rate, it affects interbank rate, but not that at which banks provide credit to customers, a situation that limits its ability in terms of controlling inflation.
Rwangombwa made the observation on Monday, November 18, while presenting to both chambers of Parliament the 2023/24 annual report of the central bank.
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The report pointed out that BNR continued its measures to curb inflation in response to the persistent inflationary pressures from the previous financial year.
In 2023, the bank pursued a tighter monetary policy, raising the central bank rate (CBR) further, from 7 per cent in May to 7.5 per cent by August.
Its monetary policy tightening to counter inflationary pressures, combined with reduced bank liquidity, led to a rise in the interbank rate, which increased by 117 basis points in the 2023/24 financial year, averaging 8.17 per cent compared to 7 per cent of the previous year, according to the report.
The interbank rate is the interest charged on short-term loans between banks. Banks constantly swap money to ensure liquidity or put spare cash to use.
The deposit rate, too, saw an increase of 136 basis points, reaching an average of 10.02 per cent in 2023/24, up from 8.70 per cent in 2022/23, a rise the report said was driven by higher treasury bill rates and an increased share of long-term deposits.
On the contrary, the lending rate – the rate at which banks charge loans to customers – decreased by 55 basis points to 15.48 per cent (in 2023/2024), from 16.31 per cent the previous year, primarily due to a higher proportion of short-term loans to corporates, which typically have lower interest rates, the report indicated.
"What did not increase is the loan interest rate that banks charge customers as it slightly went down, instead. Though this is good for customers, for us it indicates that our financial sector is not yet developed to the extent that it follows the decisions of the central bank,” Rwangombwa said.
The report showed that despite a tight monetary policy, new authorised loans increased by 33 per cent to Rwf2,163 billion in 2023/24, following a 37.2 per cent growth in the year before.
The growth was primarily driven by the economy’s sustained strong performance from the previous financial year, it added.
Though this is good for the economy, he said, it was not in line with the intention of the monetary policy.
Overall, Rwangombwa said "what is good is that there are many other measures that contributed to lowering inflation, and now we are in [price] stability,” and that there is no concern that banks can increase their rate or for loans to continue increasing.
He told parliamentarians that since inflation was high in the period under review, the government took a decision to waive value-added tax (VAT) on some imported foodstuffs to help citizens get food at relatively lower prices.
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The government also offered subsidy on fuel and public transport to ease access to such services.
As a result of different measures that were taken, coupled with improved domestic agricultural conditions, inflation eased from 18.2 per cent in 2022/2023 to 7.9 per cent in 2023/2024, bringing it back to the target band of 2 to 8 per cent.
These examples imply that the central bank rate’s impact on adjusting inflation is limited.
Commenting on monetary policy and the deployment of CBR to deal with inflation, Senator Amandin Rugira wanted to know why deposit rate went up, but the rate to credit banks provide to customers dropped.
"This means that the instrument is not working here in Rwanda,” he said, wanting to know strategies in place "to ensure that our monetary policy becomes more efficient.”