The National Bank of Rwanda has increased its lending rate by 50 basis points from 6.5 percent to 7 percent in efforts to tame the persistent high prices.

Also known as the key repo rate, this is the fee at which the Central Bank lends to commercial banks. Adjusting it upwards or downwards allows the regulation of liquidity in the banking system with an aim to stabilise the economy.

ALSO READ: How the Central Bank’s increased repo rate will tame soaring inflation

Basically, this means that with less money in circulation, consumers focus more on priority spending and discourage suppliers from increasing prices because of less demand.

While announcing the results from the quarterly Monetary Policy Committee and Financial Stability Statement on Thursday, February 16, Governor John Rwangombwa said raising the rate will continue to reduce inflationary pressures and preserve consumers' purchasing power.

"Despite the trend we are seeing of slight decrease in commodity prices on the market, we decided to increase the Central Bank rate to 7 percent as we are not yet on the safe side,” he said.

"We hope to see a continuous inflation decrease over the coming months.”

In November 2022, BNR increased the lending rate from 6 percent to 6.5 percent as the country continued to try to tame inflation. About four months earlier, it had increased the key repo rate from 5 percent to 6 percent.

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As of January 2023, inflation stood at 20.7 percent, a slight decrease from 21.6 percent in December 2022.

The consecutive increase of the Central Bank rate has resulted in an overall increase of interbank rate from 5.18 percent to 5.92 percent in 2022.

However, Rwangombwa said there was not much increase of banks’ market lending rates to individuals or corporate institutions.

The rise of commodity prices is mainly attributed to poor domestic food production linked to climate constraints and higher fuel prices.

ALSO READ: Central Bank explains rising commodity prices

However, it says that inflation will decelerate towards the benchmark bank between 2 percent and 8 percent at the end of 2023.

In January, the Central Bank reinstated the reserve requirement ratio to pre-Covid level.

This is the ratio of money that a commercial bank must hold in reserve to the amount of money it has on deposit. This money is not allowed to be used in lending or investing activities.

Earlier, Thierry Kalisa, BNR's Chief Economist, said that despite the positive economic performance recovering from Covid-19, the regulator still has to consider the current inflation by tightening money in circulation.