Rwanda’s annual average inflation eased by 0.88 percentage point to 6.64 per cent in September, down from 7.5 per cent in the previous month, according to data from the National Institute of Statistics of Rwanda (NISR).

The statistics body attributed the general fall in prices of goods and services to the decline in prices of food and nonalcoholic beverages, communication, alcoholic beverages as well as bread and cereals.

Central bank has forecasted an inflation rate of between 8 per cent and 8.7 per cent by the end of the year.

"We have no reason to change our numbers, because our projections are subject to external pressures and the situation has not changed,” Claver Gatete, Governor of the central bank said.

The annual average underlying inflation rate, which strips-off fresh food and energy, increased by 3.7 per cent in September 2011 up from the previous month’s three per cent as prices of housing, water, electricity, gas and other fuels increased by 2.7 per cent.

Central bank says that Rwanda is experiencing low inflationary pressure compared to its EAC counterparts largely due to the improved coordination between fiscal and monetary policies, which has helped to prevent inflationary fiscal deficit financing.

"The situation has not improved but (we are) working closely with government on some mop-ups as part of the central bank’s mandate to control demand for money,” he said.

He added that the bank will maintain its prudent monetary policy through regular assessment of inflationary developments to ensure inflation expectations are well anchored.

Whilst Rwanda has managed to contain inflation in single digits, the economy faces serious external challenges with the World Bank’s food prices index increasing by 33 per cent as of August, and international fuel prices at above US$100 per barrel.

The Governor says that the central bank is working with government institutions to take action on food security and also increase supplies especially energy.

Rwanda’s imports bill in the last eight months of 2011 increased 21.3 and 18.7 per cent in value and volume respectively compared to same period last year, adding pressure to local prices.  The drought in the Horn of Africa as well as high inflationary pressures in Kenya and Uganda—Rwanda’s major trading partners in the region—also threatens to exacerbate the situation.

In September Uganda's inflation rate stood 28.3 per cent, Kenya 17.3 per cent and Tanzania 14.1 per cent.

In a highly anticipated move, the central bank recently raised its key repo rate—the rate at which it lends to commercial banks— by 0.5 percentage points to 6.5 per cent in order to control inflation, a decision that experts said could trigger high borrowing costs.

However, commercial banks have promised to keep their interest rates unchanged further raising questions whether the central bank’s decision will be effective in controlling inflation.

Jack Kayonga, the Chairman of the banker’s association, says the key repo rate is not expected to have an impact on interest rates because its impact on cost of borrowing is minimal.

"We understand the reasons why KRR was increased, its impact is insignificant and banks are liquid at the moment, if any thing they (interest rates) will go down,” Kanyonga

Maurice Toroitich, the Managing Director of Kenya Commercial Bank (KCB) Rwanda said they do not intend to increase interest rates but rather monitor the evolution.

"We have no immediate intention but we shall monitor the future evolution of inflation and interest rates environment before we make any decision,” he said.

 Lawson Naibo, the Chief Operations Officer of Bank of Kigali (BK) said they have no intentions of raising the interest rate at the moment in the short term.

"The country is not experiencing runaway inflation or currency depreciation as in the other East African countries, it is still in single digit thanks to the fiscal and monetary policies,” Naibo said.

He said that higher interest rate would further increase the cost of doing business and therefore fuel inflation as the borrower would have to increase their prices, ‘cost push  inflation’.

According to Naibo, pushing up cost of doing business through increase in interest rate may result in high non performing assets for borrowers who cannot easily pass the increased costs to their customers.

"As a bank, we measure our success not only on the profits we make but also on the economic and social impact we have contributed to our stakeholders including our customers,” he said.

Banks are likely to continue to monitor the fiscal and monetary indicators and policy before taking any action on the long term interest rate decision.

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