The National Bank of Rwanda (BNR) has relaxed its key repo rate by half a percentage point to 6.5 percent after holding it at 7 percent since June 2013.
In adjusting its monetary policy instrument, BNR is responding to the demand for more liquidity to breathe new life into recovering economic activity. This is indeed the right thing to do.
The 7.4 percent GDP growth rate recorded during the first quarter of the year means that the economy has managed to overcome challenges that slowed it down in 2013 and has now returned to a faster growth trajectory of the last decade or so.
Simply put, output from productive sectors such agriculture, services/hospitality, industry, construction, and exports is growing again and wealth is being created at a higher rate than the previous year.
So, in order to sustain the high pace of wealth creation, more should be done. In the case of agriculture more acreage needs to be cleared, planted or even irrigated in order to produce more. For the case of the hospitality industry, more hotel rooms must be built or renovated in order to attract top dollar from high-end tourists. Investors in these areas need cheaper credit.
The bigger picture is that when investors expand, more jobs are created and a critical mass of people with income to consume goods and services also increases. The higher the consumption of goods and services, the more tax revenue in government hands to build infrastructure and provide social services.
It is up to banks to heed the call and relax lending rates to help build a large and vibrant private sector that will not only create more jobs and broaden the tax base, but also generate more business for banks. After all lending is the core business of banks.