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Rwanda’s central bank has announced an increase of 50 percentage points in its lending rate, raising it to 7.5%, as part of its efforts to address the current inflationary pressures and other economic concerns.
The decision was communicated by Central Bank Governor John Rwangombwa during the release of the quarterly Monetary Policy Committee and Financial Stability Statement on August 17. The lending rate, also referred to as the key repo rate, represents the interest at which the Central Bank lends funds to commercial banks. Adjusting this rate up or down allows the regulation of liquidity in the banking system, serving the purpose of stabilizing the overall economy.
Rwangombwa explained that the rate hike aims to sustain the ongoing downward trajectory in inflation rates. He expressed the anticipation that inflation would fall within the targeted band (below 8%) by the conclusion of 2023 and around 5% in the following year, 2024. However, he also emphasized the presence of unprecedented vulnerabilities, notably climate shocks, which could impact the forecast.
He noted, “The current forecast faces some uncertainty, such as the geopolitical tensions that could influence international commodity prices, as well as unpredictable events linked to climate change that continuously affect our agriculture sector performance.”
Furthermore, Rwangombwa highlighted a consistent concern in the external sector, marked by a substantial import bill. This trade imbalance has exerted pressure on the foreign exchange markets.
“Our imports have grown much bigger than the export earnings and it is coming from a bigger base as a result the deficit has widened, and that has put pressures on the exchange market,” he said.
The adjustment in the lending rate signifies Rwanda’s proactive approach to maintain economic stability amid rising inflationary pressures and external economic challenges. By influencing borrowing costs, the central bank seeks to curb inflation and ensure a balanced economic landscape.
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