How central bank’s revised key repo rate impacted the economy

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Rwangombwa said the reduction of repo rate in December had several impacts. / Timothy Kisambira

In December, last year, the central bank’s committee on financial stability reviewed the key repo rate from 6.5 per cent to 6.25 per cent in a bid to encourage banks to increase lending.

The key repo rate is the maximum rate at which commercial banks invest their money at the central bank.

Lowering the rate was with an aim to create a scenario whereby banks would make more returns when they invest with the private sector as opposed to when they invest it with the central bank.

In June, the central bank adjusted the repo rate further from 6.25 per cent to 6.0 per cent.

After the readjustment in December, a large section of the banking sector enthusiasts were skeptical on the impact of the move, saying it would have little or no impact on lending.

However, according to the latest statistics from the central bank, revision of the repo rate has contributed to an increase in broad money, credit to the private sector as well as brought down lending rates albeit slightly.

The revision has also seen more demand and purchase of government bonds.

Ordinarily, when the central bank reduces the repo rate, commercial banks earn less from their deposits with central bank. This leads to a scenario whereby banks prefer lending to the private sector or the Government.

This has been termed as one of the reasons the recent five-year Rwf10 billion infrastructure bond was oversubscribed by 222.3 per cent, with investors in the banking sector taking the largest share of 43 per cent.

In the recent case, the move by the central bank saw an increase in money supply or liquidity in the economy by 11.1 per cent.

‘Positive impacts’

Central bank governor John Rwangombwa said the reduction of the repo rate in December had several positive impacts, including increase of money in supply, decrease of lending rates as well a decline in deposits with the central bank.

“On the impact of the key repo rate, it has several impacts, including the improvement of monetary aggregates, lending rates and deposits,” Rwangombwa told The New Times.

According to data from the bank, credit to the private sector grew by 8.3 per cent from 7.9 per cent as a result of the review of the repo rate.

As a result of more supply of money in the economy, the average lending interest rate went down from 17.21 per cent in December to 17.08 per cent in June this year.

Rwangombwa explained that the revision did not see much increase in new authorized loans largely due to the base effect of the large loans taken last year for projects such as the Kigali Convention Centre.

“More directly was on the money market rates. We also intended to signal to commercial banks to increase lending. Though we did not see much increase in new authorized loans, largely due to the base effect, last year we had a huge loan for the convention centre.

“This year as of July we see a huge impact in aspects such as reduction of interest rates, reduction of interbank rates and even slightly on decrease in lending rates,” he said.

Central bank chief economist Thomas Kigabo explained that the move was a success for the central bank as it had positively influenced the market.

“The role of the central bank is to create ideal conditions for the bank to give loans and to positively influence money markets,” Prof. Kagabo said.

Dr Diane Karusisi, the chairperson of the Rwanda Bankers Association, told this paper that the move by the central bank had served to help increase the banking sector’s assets.

“In general what we see is that the repo rate does not have much impact in the demand for loans. Demand comes from investors and entrepreneurs when they have good projects,” Karusisi, who is also the chief executive of Bank of Kigali, said.

“However, when you look at the total banking industry, there has been growth of total assets showing that the revision of the repo rate has had a positive impact in increasing assets,” she added.

Going forward, experts anticipate that assets of the banking sector will grow further, lending rates will be lowered as the rates were further revised in June this year from 6.25 per cent to 6 per cent.

editorial@newtimes.co.rw