The Central Bank has lowered its key repo rate— the rate at which it lends to commercial banks by 0.5 percentage points from 7.5 percent to 7 percent to help local lenders to ease their borrowing costs.
The new rate, which will be effected at the beginning of the second quarter of this year, is expected to increase liquidity in the local banking system to help the economy recover from last year’s slow growth.
“The financial sector is recovering from a tight period after the liquidity problems in the entire sector but the lenders are still hesitant to give out loans,” François Kanimbla Governor of the National Bank of Rwanda (BNR) said yesterday shortly after the Bank’s monetary policy committee meeting.
He said that BNR’s decision was inspired by Rwanda’s macroeconomic growth with a low and stable inflation. Rwanda’s inflation was contained in single digits throughout last year and it reached 2.46 percent, the lowest in 10 years.
This is the second time BNR is revising its policy rate downwards this year. In January it implemented the 7 percent key lending rate from 9 percent which helped to lower the inter-bank trading rate and increased liquidity in the economy.
According to Sanjeev Anand, the Managing Director of Rwanda Commercial Bank (BCR), banks are unlikely to immediately reduce their interest.
“We do not intend to reduce our interest (rates) immediately. This is just a signal from the Central Bank. But with time it will reduce,” he said.
As the BNR expects a decline in the cost of funds with sufficient liquidity it does not expect an immediate response from commercial banks.
“Banks don’t rush to change their interest rates; always have reasons for clients until they have confidence in the durability of decision taken, Kanimba said.
Other measures that are expected to reduce costs of funds include the Credit Reference Bureau (CRB) which will capture and report the credit history of commercial banks clients to reduce non-performing loans.
The Central Bank through the monetary policy committee revises the ‘repo rate’ on a quarterly basis and takes a decision depending on the growth of the economy.