The National Bank of Rwanda (BNR) lowered its key interest rate by 50 basis points to 7 per cent from 7.5 per cent, noting that inflation was projected to remain within its target band at around 5 per cent this year and in 2025. The development came after two monetary policy meetings at which the Central Bank Rate remained unchanged. ALSO READ: Rwanda central bank lowers policy rate to 7% Until August 2023, the Central Bank had increased the policy rate by 300 basis points in a long tightening cycle that was aimed at containing high inflationary pressures. Since then, annual inflation peaked at 21.7 per cent in November 2022. It fell to 4.5 per cent in April this year, well within policymakers’ 2-8 per cent target range. Inflation to stabilize According to John Rwangombwa, the Central Bank Governor, inflation is projected to evolve around 5 per cent in the next two years. In the first quarter of 2024, headline inflation decelerated to 4.7 per cent from 8.9 per cent in the previous quarter, thanks in large part to declines in core and fresh foods inflation that offset an increase in energy inflation. The decrease in core inflation was mainly driven by the deceleration of core food inflation, resulting from the downward trend in international prices of key processed food items such as rice, sugar, and corn flour. While the decline in fresh food inflation was attributed to an improved supply of some fresh vegetables, due to the good performance of the agriculture sector in Season A of this year. During the same period, BNR said, energy inflation rose due to higher solid fuel prices caused by unfavorable weather conditions for charcoal production and related supply chains. “The expected stable inflation path will be supported by easing food inflation in 2024, reflecting the expected decrease in international food prices as well as the normalisation of domestic agricultural production,” the governor said. However, he added, these projections could be affected by risks, such as heightened global geopolitical tensions such as the war between Israel and Palestine and adverse weather conditions due to climate change. Economy resilient In the last quarter of 2023, the economy grew by 10 per cent bringing the overall growth for the year 2023 to 8.2 per cent. In 2023, the main drivers of growth were tourism, trade, telecommunication, manufacturing, and construction. “This high growth momentum is expected to continue as demonstrated by the performance of high-frequency indicators, including the Composite Index of Economic Activities (CIEA), which grew by 8.6 per cent in the first quarter of 2024,” Rwangombwa noted. Indicators point towards broad-based economic growth at the beginning of this year, featuring not only continuous high performance in the services and industrial sectors but also a strong agricultural revival with a good Season A following last year's low performance due to unfavorable weather conditions. Widening trade deficit Figures from the Central Bank indicate that Rwanda's merchandise exports experienced moderate growth of 0.2 per cent due to the weak performance of traditional exports, especially coffee, amidst slowing global commodity prices and decreasing revenues from manufacturing exports, despite strong re-exports. Merchandise imports increased by 5.9 per cent largely driven by high demand for capital goods especially in public transport, and consumer goods, albeit declining import bills for energy and intermediate goods. The trade deficit widened by 9.6 per cent in the first quarter of 2024. The widening of the current account deficit, driven by higher demand for imports to support domestic economic activities and lower receipts from traditional exports, continues to exert pressure on the Rwandan franc, despite being lesser than last year. “By the end of March 2024, the Rwandan franc had depreciated by 2.08 per cent against the US dollar, lower than the 3.07 percent depreciation recorded in the same period last year,” the governor said in a presentation. Given the anticipated private and government inflows this year, the governor added that the gross official reserves are expected to remain adequate, above 4.0 months of imports. Market developments Central Bank figures indicate that the interbank rate increased to an average of 8.29 per cent in the first quarter of 2024, up 93 basis points from 7.36 per cent in the first quarter of 2023, due to tighter monetary policy. Interest rates on government securities, deposits, and lending also increased. In particular, the average lending rate rose by 38 basis points, from 15.97 per cent in the first quarter of 2023 to 16.35 per cent in the first quarter of 2024. The increase was particularly noted for short-term loans. Financial sector “sound and stable” According to the Central Bank, the financial sector is expected to remain sound and stable over the medium term despite global and domestic macroeconomic uncertainties. This resilience is backed by good governance, ample capital and liquidity reserves, and strengthened risk management practices. “The National Bank of Rwanda will continue monitoring potential risks through stress tests and other supervisory measures to ensure financial institutions can absorb plausible shocks,” Rwangombwa said.
