BNR maintains repo rate at 6.5% but El-Nino effect could push inflation up

The Central Bank’s diagnosis of the country’s economic performance in the second quarter has returned a positive outlook with Governor John Rwangombwa announcing at a news briefing, yesterday, a clean bill of health for the economy and stayed the repo rate at 6.5 per cent.
Central bank governor Rwangombwa and his deputy Dr Monique Nsanzabaganwa brief the media in Kigali yesterday. (Timothy Kisambira)
Central bank governor Rwangombwa and his deputy Dr Monique Nsanzabaganwa brief the media in Kigali yesterday. (Timothy Kisambira)

The Central Bank’s diagnosis of the country’s economic performance in the second quarter has returned a positive outlook with Governor John Rwangombwa announcing at a news briefing, yesterday, a clean bill of health for the economy and stayed the repo rate at 6.5 per cent.

Flanked by members of the financial stability and monetary policy committees, Rwangombwa was in a buoyant mood when he said all the economy’s key performance indicators were in good shape and predicted strong growth in the third quarter, which closes today.

The Financial Stability Committee’s primary concern is the performance of the country’s financial sector consisting of commercial banks and microfinance institutions forming the engine that powers economic growth in form of credit to the private sector.

For the period ending June, the governor said, financial sector remained “sound and well capitalised with adequate liquidity levels and good quality assets.”

Commercial banks were adequately capitalised with 24.3 per cent and 31.4 per cent for microfinance institutions against the central bank’s benchmark of 15 per cent.

Non-performing loans were also seen dropping in the second quarter ending June, with the situation among commercial banks standing at 5.9 per cent from 6.6 per cent, while that of microfinance firms was at 7.4 per cent from 7.6 per cent, compared to the same period last year.

However, the NPL rate for both commercial banks and microfinances is still higher than the central bank’s 5 per cent target.

Meanwhile, profitability in the banking and micro-finance sectors slightly improved with commercial banks seeing their return on assets surging from 2.1 per cent recorded in June, last year, to 2.4 per cent in the same period this year, while that of microfinancial firms grew from 3.8 to 3.9 per cent.

Return on equity for banks grew from 12.1 per cent in June, last year, to this year’s 13.1 per cent, while that of micro-finance firms grew from 11.6 per cent to 11.9 per cent.

Accommodative monetary policy

The central bank’s Monetary Policy Committee’s primary responsibility is to regulate the amount of money and credit in the economy in order to keep inflationary pressures manageable.

Boosted by what the Financial Stability Committee found to be a robustly sound financial sector, the Monetary Policy Committee reported that outstanding credit to the private sector grew by 26.6 per cent in the first eight months of 2015 compared to 15.5 per cent in the same period last year.

Newly authorised loans in the first eight months of 2015 increased by 9.2 per cent pushed by what the governor called an accommodative monetary policy.

Growth of ‘broad money’ which generally refers to the amount of cash in circulation drastically reduced in the first eight months to 16.1 per cent from 23.7 per cent in the first eight months of last year.

The industry lending rate average among commercial banks stood at 17.4 per cent between December 2014 and August this year, while deposit rates stood at 8.4 per cent.

Last week, the National Institute of Statistics of Rwanda released figures indicating that the economy grew by 7 per cent in the second quarter and was tipped to surpass earlier projections of 6.5 per cent.

This received further backing yesterday, with Rwangombwa noting that the economic performance in the first two months of the third quarter (July and August) was strong, at 8.8 per cent, showing signs of ending on a high with only September figures yet to come in.

Worrisome inflation

The governor reported that inflationary pressures remained low and manageable, averaging 1.7 per cent in the first eight months, with the highest being 3 per cent recorded in August.

The central bank had earlier projected this year’s inflationary pressures to not exceed 3.5 per cent by December against the medium term target of 5 per cent.

However, revisions were announced yesterday on account of the projected El-Niño rains that could affect agricultural harvest, lead to low food supply and push the price of foodstuff above normal.

From 3.5 per cent, Rwangombwa said they expect inflationary pressures to play between 3.3 per cent and 4.6 per cent at most by the end of the year.

“But this should not be painted as alarming because it’s still below our medium term projections of 5 per cent,” he said.

Kenya Commercial Bank managing director Morris Toroitich, who chairs the Rwanda Bankers’ Association, agreed with the central bank’s projections on the likely impact of El-Niño, noting that food supply and its pricing is a key inflation factor.

While El-Niño is an internal factor, central bank also has external factors to worry about, including foreign exchange pressures mainly on account of Rwanda’s lowly performing exports whose resultant trade deficit has seen the Franc fast depreciating against US Dollar.

The official depreciation rate currently stands at 5.2 per cent, seen as stable and normal after an errant period on the forex market in the last couple of months that had seen the Franc depreciating at 8.73 per cent in June and July due to alleged speculation by dealers.

However, this has since stabilised, according to Rwangombwa, with the forex market rate standing at 7.3 per cent, commercial bank rate at 7.2 per cent and the central bank’s rate at 5.2 per cent.

With lower than expected growth globally owing to uncertainty in the US economy and a slowing Chinese economy, commodity prices are not expected to improve at least by the last quarter of 2015 and this prospect has already hurt commodity exporters such as Rwanda.

“That means the economy remains vulnerable to the exchange rate pull inflation due to continued external balance of payment deficit; however, the continued low oil prices is welcome as it will play a moderating effect,” Toroitich said.

Although Rwanda’s earnings from formal exports in the first eight months of the year declined by 7.7 per cent compared to the same period last year, the trade deficit improved by 5.3 per cent, to $1.14 billion from $1.21 billion, on account of a 5.7 decline in the value of formal imports.

“In view of the above key economic and financial developments and the fact that the current policy stance is already yielding results, we have decided to keep the repo rate at 6.5 per cent for the fourth quarter of 2015,” Rwangombwa said.

The central bank has kept the repo rate unchanged since June 2014 when it reduced it from 7 per cent.

Toroitich welcomed the decision on behalf of the sector, saying it is an indication of an “expectation of short/medium term stability around the key factors such as inflation and foreign exchange.”

editorial@newtimes.co.rw

 

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