Economists weigh in on new BNR lending rate increase

Economists are confident that the increased Central bank lending rate to commercial banks will tame the continued spike in the cost of living by reducing money in the economy and discouraging price hikes on local markets. Despite different interventions by the government, inflation has gradually increased month after month reaching a double-digit. This is mainly attributed to external economic pressures fueled by impacts of the Russia-Ukraine war that hit while economies were just recovering from the pandemic. This has also collided with low agriculture production within the country due to climate constraints. To put it into perspective, food and non-alcoholic beverages increased by 39.7 percent in October 2022 compared to the same period last year and increased by 5.3 percent compared to September 2022, housing, water, electricity, gas and other fuels increased by 8.9 percent and by 1.3 percent in the same comparison, according to National Institute of Statistics. Talking to The New Times, Lina Higiro, CEO of NCBA Bank Rwanda said that with the increased central bank rate and the reinstalling of 5 percent reserve ratio at the start of 2023, the message is that it is now a depositors market. “If you are an individual or a company with fixed deposits, save them because lending is going to be expensive.” However, she said that banks are watching to see how the policy is going to affect the market over time but it does not immediately translate into an increase of banks’ interest rates. Jean Claude Rwubahuka, a Kigali-based economist, is of the view that increasing the central bank lending rate is the right measure to address the current economic situation. He explained that the regulator has two approaches to reducing money in circulation by either increasing its lending rate or issuing more treasury bonds, of which banks would hurriedly opt to take because there are no risks involved contrary to lending to people or corporations. “Normally the impact of the policy should be felt in the market within a period of three months but not more than a year,” said Rwubaka, adding that it wouldn’t be advisable for the central bank to further increase its lending rate because it would hurt the investment aspect of the economy. Another economist, Gerard Rurangwa said that the government should invest in boosting domestic production, especially in agriculture, to be able to feed its people and minimize imported inflation. For instance, probably at the start of this year, we would buy 25kg of rice at around Rwf20,000 from neighbouring countries but now the price has doubled to around Rwf40,000, he explained. “On the other hand, people should spend sparingly on what they really need until inflation is brought back under control,” he added. The central bank says there is light at the end of the tunnel where despite consumer prices hike projected to average at around 13.2 percent at the end of this year, it will decelerate back within the benchmark of between 2 percent and 8 percent at the end of 2023.

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Economists weigh in on new BNR lending rate increase