Rwandan Central Bank (BNR) has raised its benchmark interest rate by 0.5 percentage points to 5 percent, in a move aimed at containing rising prices and protecting consumers’ purchasing power.
The decision was announced following a quarterly meeting of the Monetary Policy Committee and the Financial Stability Committee, as inflationary pressures continued to build in the domestic economy.
The benchmark rate had remained at 4.5 percent since April 2020, but the central bank said changing economic conditions required a tighter monetary policy stance.
BNR Governor John Rwangombwa said the decision was driven by expectations that inflation could rise beyond the upper limit of the central bank’s preferred range.
At the time, consumer prices had already increased by 4.3 percent in January 2022, while the central bank projected average inflation of around 7.5 percent for 2022, with a risk that it could exceed 8 percent.
The pressure was largely linked to higher global commodity prices, particularly energy and food.
The recovery in global demand following the COVID-19 pandemic had pushed up the prices of industrial inputs and other commodities.
Crude oil prices, for example, rose sharply, increasing the cost of petroleum products imported into the country and putting additional pressure on domestic prices.
The Russia-Ukraine conflict later intensified concerns over global commodity and energy markets.
Rwangombwa explained that raising the benchmark rate is one of the tools available to the central bank to reduce excessive price pressures.
“When inflation is very high, everything you have done that is called development seems to become worthless because the purchasing power of the money people earn becomes very low,” he said.
The mechanism is straightforward: higher central bank rates generally make money more expensive in the financial system, encouraging saving while reducing excessive borrowing and spending.
This can help moderate demand and, over time, ease inflationary pressures.
However, BNR said the increase was not expected to significantly undermine lending by commercial banks because their lending funds do not come solely from the central bank.
The central bank maintained that a 5 percent benchmark rate remained relatively low and would continue to support credit to businesses and the private sector.
The move came as the country was also experiencing strong economic recovery. Rwanda’s economy grew by 13.4 percent in the fourth quarter of 2021, following growth of 10.3 percent in the third quarter, strengthening expectations that the economy would continue expanding in 2022.
Meanwhile, the Rwandan franc had performed better than initially expected, losing about 3.8 percent of its value in 2021, compared with a 5.4 percent depreciation recorded in December 2020. BNR attributed the relatively stronger performance partly to increased foreign-exchange earnings from exports.
The central bank projected that the economy could grow by at least 7.2 percent in 2022, even as policymakers remained alert to inflation risks.
The interest-rate decision therefore reflects a delicate balancing act: supporting economic recovery and access to credit while preventing rising prices from eroding household incomes and weakening the gains made through economic growth.
BNR’s subsequent policy actions would see the benchmark rate rise further as inflation intensified, underscoring the central bank’s broader effort to bring price growth back toward its medium-term target range.
Its later annual reporting shows that the policy tightening contributed to a gradual easing of inflation after it reached exceptionally high levels in 2022.
