Central bank projects lower inflation in 2014

Inflationary pressures are expected to ease in next year’s first quarter, the National Bank of Rwanda has said. Speaking during the quarterly Monetary Policy and Financial Policy committee meeting in Kigali yesterday, John Rwangombwa, the governor of the central bank, said good agricultural performance and monetary policy execution were the key factors that control inflation.However, he said the major risk against the inflation outlook is the depreciation of the Rwandan Franc, which may arise from the likely rapid increase in demand for imports associated with the positive outlook in the economy owing to credit expansion.Outstanding credit to the private sector increased by 11.3 per cent between December, last year, and November, while inflation remained moderate, declining from 5.1 per cent in September this year to 4.6 per cent last month.On the foreign exchange market, the franc depreciated by 5.7 per cent against the US Dollar as of yesterday because of increased demand for foreign exchange to finance imports.Rwangombwa said depreciation of the local currency was worrying even as they always strived to keep it at less than two per cent by intervening in the Forex market when foreign currencies shortages arise.“We normally keep our depreciation at around or less than two per cent but because of pressures we have had over the last two years, it has depreciated by 5.7 per cent, which is worrying. That’s why we are working with our colleagues in government to increase our foreign exchange earnings as we see our import bill growing every year,” the central bank chief said.PoliciesIn view of these developments and outlook in economic and financial fundamentals at both international and national levels, the Monetary Policy Committee noted the need to maintain the Key Repo Rate at 7 per cent in order to sustain macroeconomic stability and encourage financing of the economy next year.A repo (repossession) rate is the discount rate at which a central bank repurchases government securities from the commercial banks, depending on the level of money supply it decides to maintain in the country’s monetary system. To temporarily expand the money supply, the central bank decreases repo rates so that banks can swap their holdings of government securities for cash. In June, the central bank reduced the rate from 7.5 per cent to 7 per cent to encourage commercial banks to lend to the private sector.Rwangombwa said the decision had a significant impact on the money market rates, with the Repo rate decreasing from 6.68 per cent in June to 4.4 per cent this month, while the Treasury bill rate moved from 10.8 per cent to 6 per cent in the same period.The interbank rate moved from 9.58 per cent to 6 per cent and the deposit rate moved from 10.6 per cent to 8.54 per cent over the same period.“The repo rate reduction had an effect in the banks’ lending rates which reduce with time because of the repo rate’s direct impact on the deposit rates. It takes time for banks to adjust because the banks already have annual deposits taken at higher rates from the market,” he said.Commercial banks’ lending rates have reduced from an average of 17.65 per cent to 17.19 per cent since June.Looking forward, Rwangombwa said the current economic performance indicators are trending upwards but since there are no demand pressures as indicated by the negative output gap, the monetary policy has room to remain accommodative in order to continue supporting economic financing through credit expansion without putting much pressure on inflation.Banks speakLawson Naibo, the chief operations officer of Bank of Kigali, said maintaining the Key Repo Rate meant the bank’s interest rates would remain relatively stable at the same time encouraging more private sector investments.“Maintaining the Key Repo Rate is an indicator the economy is doing well, inflationary pressures are low, private sector investments are increasing and it shows the economy is going to do much better next year,” said Maurice Toroitich, the chief executive of Kenya Commercial Bank, Rwanda.The Rwandan economy continued to grow this year but at a slower pace compared to last year mainly due to uncertainties on the international financial markets and effects of cuts and delays of some donor support.