Assessing the impact of Rwanda's 50bps repo rate cut to 6.5%

Rwanda's economy has seen a significant adjustment as the National Bank of Rwanda announced a 50 basis points cut to its repo rate, bringing it down to 6.5 per cent. This marks the second reduction since the pandemic-triggered cut in April 2020. In an exclusive interview with CNBC Africa, Central Bank Governor John Rwangombwa elaborated on the reasons behind this substantial rate cut. He highlighted that the main drive for the decision was the stable inflation outlook projected for 2021-2025 within the band of two to eight per cent, with a target of around five per cent. The Central Bank had previously increased its policy rate to combat rising inflation in recent years, and with the inflation now stabilized, there was room to ease monetary conditions. The impact of this rate cut is expected to be seen in the immediate adjustment of short-term interest rates, particularly in the money market, while the transmission to lending rates may take longer to follow suit. Governor Rwangombwa also discussed the financial stability of the sector, emphasizing the strong capital base and liquidity of banks, which have been able to withstand global challenges, including those posed by the COVID-19 pandemic. He expressed confidence in the maturity of the financial sector and its ability to weather external shocks and fluctuations in global commodity prices. Looking ahead, he reassured about healthy liquidity levels in banks, supported by monetary tools to ensure continued growth in private sector credit. The Governor also addressed the transition of three banks into the microfinance sector, a move driven by regulatory changes to align capital requirements with the capacities of financial institutions, thereby enhancing their focus and strength. On the topic of a cashless economy and cyber security, the Central Bank is actively engaged in educating the population about financial products and risks, along with working with financial institutions to bolster IT governance and security measures. Governor Rwangombwa underscored the importance of collaboration with law enforcement bodies to safeguard financial institutions against cyber threats. As for the exchange rate policy, the Governor emphasized that Rwanda's foreign exchange market is market-driven, allowing the market to determine the competitiveness of the currency on the international stage. This approach remains unchanged amid shifting global trade dynamics, indicating confidence in the market's ability to position Rwanda competitively. Overall, the rate cut reflects Rwanda's efforts to stabilize and boost its economy post-pandemic, with a focus on prudent monetary policies, financial sector resilience, and cyber security vigilance.