Rwanda’s Central Bank cuts interest rate by 50bps to 7%

Rwanda's Central Bank recently made a significant move by cutting its interest rate by 50 basis points to 7%, a decision that has raised eyebrows in the financial sector. Joining CNBC Africa for insights on the factors behind this decision was Kevin Karobia, a seasoned Senior Investment Analyst at BK Capital Ltd. The Governor of Rwanda's Central Bank highlighted various key points that influenced this strategic move. Kevin Karobia provided valuable insights, shedding light on the implications of this decision on the Rwandan economy and its competitiveness regionally. The key theme revolving around this decision remains the balancing act between global economic uncertainties and domestic stability efforts. Let's delve deeper into the key points discussed in the interview: 1. Inflation and Agricultural Production Drive Interest Rate Reduction The decision to cut interest rates was primarily influenced by Rwanda's stable single-digit inflation rate, averaging 4.7% in 2024. This favorable inflation environment, coupled with the positive outlook on agricultural production, prompted the Central Bank to take a proactive stance towards lowering interest rates. Kevin Karobia emphasized that Rwanda's resilience to adverse weather conditions and the strong performance of agricultural seasons A and B positioned the economy well for sustained stability. 2. Trade Imbalance Challenges and Currency Depreciation Despite strong export performance, the faster growth rate of imports over exports continues to pose challenges for Rwanda's trade balance, leading to currency depreciation concerns. Kevin Karobia highlighted the need for strategic measures to address this trade imbalance, especially in the context of heavy infrastructure imports impacting the trade deficit. However, he noted a positive trend indicating a slower deterioration in the trade balance compared to previous years, offering some respite amidst currency depreciation worries. 3. Interbank Market Dynamics and Liquidity Concerns The increase in the interbank rate to 8.3% raised eyebrows in the banking sector, indicating heightened liquidity demands among banks. Kevin Karobia explained that despite the rise in interbank rates, interbank volumes remained strong, signaling robust collaboration among banks for liquidity support. The Central Bank's intervention in the reverse repo markets underscored the importance of maintaining adequate liquidity levels to support financial stability. Kevin highlighted the need for continued interbank collaboration at lower rates to enhance financial performance and mitigate liquidity risks. Quote: Kevin Karobia emphasized, 'The fact that from home, some developments have been made. We don't expect that this will be as adverse as it was in previous periods.' Rwanda's Central Bank's strategic interest rate cut signals a bold step towards fostering economic growth and stability amidst global economic uncertainties. The decision reflects a proactive approach to maintaining inflation within target ranges, supporting agricultural resilience, and addressing trade imbalance challenges. As Rwanda navigates the complexities of a dynamic global economic landscape, the Central Bank's concerted efforts to balance domestic priorities with regional competitiveness are poised to position the country for sustainable growth and resilience.