Rwanda’s central bank cut its Central Bank Rate (CBR) by 50 basis points to 4.50 percent to “mitigate the shock on the Rwandan economy” by further loosening monetary policy, ease liquidity conditions in the banking sector and support a recovery of the economy.
It is the first rate cut by the National Bank of Rwanda (NBR) this year and only the second since December 2017 following a similar-sized rate cut cut in May 2019.
“Considering that inflation is projected to decelerate in the second half of 2020, owed to a drop in aggregate demand, the MPC (monetary policy committee) decided to cut the Central Bank Rate (CBR) from 5.0 percent to 4.5 percent,” NBR said.
It added the expected decline in inflation points “out the need for policy measures to support aggregate demand in the economy.”
Last month took several initiatives to help mitigate the economic impact from Covid-19, including NBR injecting 23.4 billion Rwandan franc into the banking system by lowering the reserve requirement ratio by 100 basis points to 4.0 percent, setting up a lending facility of 50 billion francs and easing prudential requirements to temporarily allow banks to restructure outstanding loans by borrowers that are facing cash flow challenges.
As of April 10, banks had restructured 7,952 loans, worth 255 billion francs, NBR said.
“The global economic. disruptions caused by the COVID-19 pandemic are weighing on Rwanda’s economy,” the central bank said, adding the outbreak of the virus had led to a significant slowdown in the services and industry sectors after a strong performance in the first two months of the year.
Demand for loans has also fallen, with new authorized loans down by 10.6 percent in the first quarter. The trade deficit has also worsened by 18.8 percent in the first quarter due to higher imports compared with exports.
However, NBR said the government’s policy measures to help raised demand for credit after the virus subsides, contributing to a reduction in the trade deficit and a stable foreign exchange.
Inflation in the first quarter of 220 was 8.2 percent, mainly due to higher food and energy prices, but inflation in now expected to decelerate to an average of 6.0 percent for the year and 1.0 percent in 2021, respectively.
Earlier this month the International Monetary Fund approved the disbursement of $109.4 million to help meet Rwanda’s balance of payment needs as the pandemic has ground the economy to a halt.
“A temporary widening of the budget deficit is appropriate to mitigate the health and economic impact of the pandemic,” the IMF said, adding once the crises abates, the fiscal adjustment path should be adjusted to preserve debt sustainability in the medium term.
It added that monetary policy should be data driven and NBR should stand ready to provide additional liquidity support if needed.