The National Bank of Rwanda (BNR) has increased the lending rate from 6 percent to 6.5 percent as the country continues to tame inflation.
Also known as the key repo rate, this is the fee at which the Central Bank lends to commercial banks. Adjusting it upwards or downwards allows the regulation of liquidity in the banking system with an aim to stabilise the economy.
During the quarterly Monetary Policy Committee and Financial Stability Statement released on November 15, Governor John Rwangombwa said raising the rate will reduce inflationary pressures and preserve consumers' purchasing power.
Basically, this means that with less money in circulation, consumers will focus more on priority spending and discourage suppliers from increasing prices because there is less demand.
"Increasing the policy rate cannot solely address the increase of prices but it's one of the measures needed to be taken along with other government subsidies in different sectors," he explained.
In August, the Central Bank rate was increased to 6 percent, which resulted in the increase of interbank rate from 5.54 percent in the second quarter to 6.5 percent in the third quarter of 2022.
However, Rwangombwa said they have not seen banks' lending rates to individuals or corporate institutions increase.
Following this decision, the Central Bank will also reinstate the reserve requirement ratio to pre-Covid level of 5 percent effective January 1st, 2023.
This is the ratio of money that a commercial bank must hold in reserve to the amount of money it has on deposit. This money is not allowed to be used in lending or investing activities.
Explaining the decision, Thierry Kalisa, BNR's Chief Economist, said that despite the positive economic performance recovering from Covid-19, the regulator still has to consider the current inflation by tightening money in circulation.
The central bank projects the rise of consumer prices to around 13.2 percent at the end of 2022. This is 1.1 percent higher than what was recently projected in August.
"Domestic food production linked to climate constraints and higher prices of inputs have led to surging food prices this year," the monetary policy committee reported.
However, it says that inflation will decelerate towards the benchmark bank between 2 percent and 8 percent at the end of 2023.