Rwanda’s Central Bank hikes policy rate by 50bps

Rwanda's Central Bank, in a bid to tackle rising inflationary pressures and preserve consumer purchasing power, has raised the policy rate by 50 basis points from 6% to 6.5%. This move comes amidst a backdrop of global and domestic supply shocks impacting the country's economy. The National Bank of Rwanda's Chief Economist, Thierry Kalisa, shed light on the factors driving inflation and the rationale behind the bank's decision in an exclusive interview with CNBC Africa's Julius Bizimungu. Kalisa delved into the intricacies of the inflation dynamics in Rwanda, highlighting the differences between the Urban CPI and the Rwanda CPI. He emphasized that the Rwanda CPI, which has a higher weighting on food components, tends to be more volatile and closely linked to the domestic production in the agricultural sector. Kalisa pointed out that two main drivers of inflation in Rwanda are external supply shocks, driven by global commodity prices, and challenges in the domestic agriculture sector due to climate change and input prices. Discussing the impact of energy inflation, which has stabilized around 18.9%, Kalisa noted that government measures have helped mitigate the effects of international price increases on fuel. He highlighted the importance of stability in energy prices and the role it plays in curbing overall price increases in the economy. The conversation shifted to the global landscape, with Kalisa acknowledging the ripple effects of events like the Russia-Ukraine conflict and supply chain disruptions in China due to the COVID-19 situation. He underscored the challenges faced by the global supply chain, leading to increased costs and delayed transportation of goods, ultimately impacting consumer prices. Addressing the lag in the transmission of monetary policy decisions to the economy, Kalisa explained that the effects of rate changes could take up to a year or more to be fully reflected. He emphasized that the central bank's decisions are forward-looking, aiming to anticipate and address future inflationary pressures. Kalisa elucidated on the objective behind the increase in the policy rate, highlighting the need to balance supply and demand to stabilize prices. By tightening monetary policy, the central bank aims to curb volatility in components like energy and food products, ultimately aiming to bring inflation back to the target range of 2 to 8%. When questioned about the sustainability of continued monetary tightening, Kalisa clarified that central banks tighten policy to control inflation and bring it back within the target range. He emphasized that the tightening is a temporary measure aligned with prevailing economic conditions. In response to concerns about the impact on interbank rates, Kalisa outlined the two-step transmission mechanism of monetary policy. While short-term rates react promptly to changes, long-term rates and the overall economy may take more time to adjust, with the full impact expected to materialize over the next year. The discussion also touched upon the appreciation of the US dollar and its implications for emerging market currencies like Rwanda's. Kalisa emphasized the need to assess the optimal level of currency depreciation that supports sustainable economic development. He pointed out that as Rwanda transitions from infrastructure investment to value-added exports and increased tourism, the current account deficit is expected to reduce, leading to a more balanced exchange rate in the long term. In conclusion, Kalisa provided insights into Rwanda's proactive measures to address inflationary pressures and maintain economic stability. The Central Bank's decision to increase the policy rate aligns with its forward-looking approach to monetary policy and its commitment to ensuring sustainable economic growth in the country.