François Kanimba, the central bank Governor, has ruled out the possibility of the economy plugging into deflation as consumer prices continue to fall, which may lead to a drop in consumer demand.
On annual basis, overall inflation as shown by increase in prices of goods and services, dropped from 5.7 percent in December 2009 to 0.2 percent in October, this year, signaling a possible deflation.
This is well below the central bank’s target of 7 percent for the whole year. “The current assessment of the factors behind low inflation is generally different from those that drive a deflation process. The declining prices of imports are a big explanation of what is happening,” Kanimba said, yesterday, during a press briefing after the quarterly Monetary Policy Committee (MPC) meeting which reduced the Bank’s key repo rate to 6 percent from 7 percent.
In terms of annual average, inflation slowed down to 3.3 percent in October, from 4.8 percent in June, 6.5 percent in March 2010 and 10.3 percent in December 2009, the Governor said.
He explained that a general decline in imported inflation and increased productivity in the agricultural sector has been the fundamental factor behind low inflation.
Good performance in agriculture has contributed to the general decline in prices of foodstuff which comprise the largest share of Consumer Price Index (CPI).
“Prices of imported goods to Rwanda have dramatically fallen in the last 12 months – this is not something which will continue forever. It is linked to the global economic shock,” Kanimba observed, ruling out deflation.
According to the Governor, prices of imported goods from the East African Community (EAC) have also fallen with enhanced regional economic integration following the implementation of Common Market. “We realize that among our imports there are more products from the EAC, which have also experienced low pricing compared to what was the case before the common market protocol,”
Kanimba observed that the changes in the prices of goods and services, as shown by the CPI, are expected to continue fluctuating between 1.4 percent in December and 4 percent in March 2011.
“When you look at weather conditions in season A, the performance of the agricultural sector is not very good and, probably, can have a negative effect on food prices in the coming months, but at the same time, fuel prices have recently been revised upwards; this can also generate some inflation,” he said.
The central bank says the projected increase in inflation is mainly due to the rising oil prices on the international markets, which remains among the main drivers of the country’s inflation.
According to the National Institute of Statistics, monthly consumer prices increased by 0.22 percent, while food and non-alcoholic beverages registered the biggest drop in prices over 12 months, falling 4.83 percent.
Prices of bread and cereals declined by nearly 15 percent, but those of fish went up by 12 percent.
This year’s low inflationary pressure is expected to enhance economic growth, with the economy expected to expand by 7.2 percent.