Rwanda's Central Bank raises repo rate to 5%

Rwanda's Central Bank has raised the key reporate by 50 basis points to 5% at today's MPC reading. The move comes as the economy continues to show strong growth and inflation pressures from both global and domestic factors. Central Bank Governor John Rangombua explained that the decision to increase the repo rate is aimed at curbing the rising inflation, which is fueled by the economy performing well and expected to surpass its full potential by mid-year. With projections indicating an average inflation rate of around 7.5%, the Central Bank is taking preemptive measures to manage the inflationary pressures. The global economy is also a contributing factor, with inflation expected to reach 4.8% this year. Rwanda's economic performance has been robust, with growth reaching double digits in the past three quarters and expected to maintain this momentum into 2022. Projections indicate a growth rate of 7.2% for next year. The Central Bank's decision to increase the repo rate is part of its monetary policy tools to stabilize inflation and support the economy's growth. Governor Rangombua stated that the inflation pressures are expected to ease by mid-2023, aligning with the Central Bank's policy path. The recent interventions by other central banks in the region, such as Kenya and Tanzania, are reflective of the global inflation trends and the need for monetary policy actions to address the economic challenges. However, Governor Rangombua emphasized that Rwanda's decisions are based on local economic projections and not influenced by external interventions. He highlighted that the increase in the repo rate is a proactive step to manage inflation expectations and support sustainable economic growth. The Central Bank's focus on maintaining a stable economic environment while addressing the inflation pressures reflects its commitment to ensuring financial stability and growth in Rwanda. In terms of external trade, Rwanda has seen a significant increase in export receipts, driven by rising commodity prices and non-traditional exports. The country's balance of payment position has shown improvement, with export receipts outweighing the increase in imports. However, the current account deficit is expected to widen due to upcoming large-scale infrastructure projects that will increase the import bill. Governor Rangombua pointed out the potential of the African Continental Free Trade Area (AfCFTA) to boost Rwanda's export earnings in the long term. While acknowledging the challenges posed by the pandemic, he highlighted the importance of proactive measures to capitalize on the opening of African borders and promote regional trade. To maximize the benefits of the AfCFTA, Rwanda needs to focus on enhancing competitiveness in key sectors, such as services and manufacturing, and improving transport infrastructure to facilitate trade. With construction remaining a significant sector driving imports, Governor Rangombua underscored the importance of balancing import needs for infrastructure development with investments in domestic manufacturing. While construction materials continue to be a major component of the import bill, he emphasized the positive impact on industrialization and economic activity in Rwanda. The Central Bank's strategic policy actions and focus on sustainable economic growth underscore its efforts to navigate inflationary pressures and support the country's development trajectory.