Last week, the central bank raised the Key Repo Rate (rate at which it lends to commercial banks), by 0.5 percentage point to 6.5 per cent, in an effort to control inflation.
The Central Bank’s decision was stirred by the high rise in the prices of goods and services. Rwanda’s inflation rose to 7.52 per cent in August, the lowest in the East African region. Inflation is expected to remain at single digit at 8.2 per cent by the end of the year.
Although raising the repo rate could lead to higher borrowing costs, the decision will help curb inflation which could otherwise have exacerbated the country’s economic situation.
In order to spur economic growth, the Central Bank has managed to keep borrowing costs low since last year, as credit to the private sector grew by 20.9 per cent by August.
Raising the policy rate will only supplement other measures including Government’s decision to reduce fuel taxes, reduce sugar prices as well as its commitment to support the private sector, by financing additional imports in case of important supply shortage.
Improved coordination of the fiscal and monetary policies between the Central Bank and the Ministry of Finance to avoid inflationary fiscal deficit financing will consolidate the gains made in the economy and prepare for long term growth.