Rwanda’s Central Bank cuts MPR by 50bps to 6.5%

Rwanda's Central Bank recently announced a 50 basis points cut in the Monetary Policy Rate (MPR) to 6.5%, aligning with market expectations. Kevin Karobia, Senior Research Investment Analyst at BK Capital, provided expert insights on the implications of this decision during a CNBC Africa interview. The key theme of the discussion centered around the economic growth, inflation trends, market response, and the impact on various sectors in Rwanda. Here is a detailed analysis and forecast based on the conversation with Karobia. Economic Growth: Governor Karobia highlighted the robust economic growth in Q1, reporting a 9.7% increase compared to the previous year. The agricultural sector, a significant contributor to Rwanda's GDP, showed remarkable performance, signaling positive growth prospects for the economy. Additionally, the Composite index for economic activity was at 17.9%, reinforcing the projection of strong GDP performance in the upcoming quarters. Inflation Trends: While there were slight increases in co-inflation and energy prices, the Governor noted a decline in food inflation, reflecting the positive impact of the agricultural sector's growth. Karobia emphasized that the central bank's decision to cut rates was supported by inflation numbers within target ranges. Market Response: Karobia predicted a moderation in lending rates following the MPR cut, leading to improved private sector credit growth. He anticipated a positive shift in interbank rates, making business operations more cost-effective. The gradual decline in currency depreciation, coupled with easing market conditions, indicated a favorable outlook for capital flows and investments in Rwanda. Sectoral Impact: The service and trade sectors were identified as potential beneficiaries of the rate cut, with expectations of increased trade activities and improved credit accessibility. Karobia acknowledged the challenges in the lending market, citing legacy loans as a factor influencing the pace of rate transmission to end-users. Nonetheless, he anticipated a positive impact on domestic spending and investments, fostering economic growth. Future Outlook: Looking ahead, Karobia forecasted a continuation of the rate-cut trend, considering global economic factors and Rwanda's inflationary pressures. He suggested the possibility of another 50 or 25 point cut in the next policy decision in November, driven by stable agriculture inflation and favorable economic conditions. Global Trends: Karobia discussed the potential effects of the US Federal Reserve's rate decisions on capital flows in Rwanda and emerging markets. He anticipated increased investments and FDIs in Rwanda, supported by a weakened US dollar. Moreover, he highlighted the positive outcomes expected from infrastructure projects like the Bugusera airport and increased flows from partners and international organizations. Mining Sector: The mining sector's impressive performance in 2023, characterized by double-digit growth, bodes well for Rwanda's economy. Karobia emphasized the importance of FX flows from mining and agriculture exports, predicting a positive impact on commodity prices and current account balances. In conclusion, Karobia's analysis presented a positive outlook for Rwanda's economy, supported by favorable growth indicators, inflation trends, market responses, and sector-specific benefits. The Central Bank's decision to cut the MPR reflected a strategic move to stimulate economic activities, enhance credit accessibility, and foster sustainable growth across various sectors.