Effective from January 2019, the National Bank of Rwanda, (BNR) will adopt a price-based monetary policy framework for implementation of the monetary policy in Rwanda.
This follows the BNR Board of Directors’ ordinary quarterly meeting held in Kigali on 20th December 2018.
Since 1997, BNR has been implementing its monetary framework under a monetary targeting framework which is used in countries with economies that have not yet reached levels where the population can get different ways to save and get banks credits.
Under this framework, BNR has managed to keep inflation low and stable averaging 6.1 percent for the period of 1997 to 2017 and 1.4 percent during the first eleven months of 2018.
Speaking to journalists, the Governor of the National Bank of Rwanda, John Rwangombwa said that BNR will change from the monetary targeting framework and adopt Price Based Monetary policy Framework starting from January next year
"When we realized the money in hands of the population is getting much that it can cause inflation, we drew it from them and when we see it is getting low, we add it to the market. When it is getting much, we sell bonds and get it and when it becomes low, we let the money flow to market," Rwangombwa said.
Prof. Thomas Kigabo Rusuhuzwa, Chief Economist at National Bank of Rwanda, said that BNR has chosen to adopt the price based monetary framework because they found it is modern and it accords to Rwanda’s current national financial status.
"Rwanda’s financial status is improving so that residents can now access different platforms to save and get loans. Choosing the monetary policy framework depends on the benefits you get from that," Prof. Kigabo said.
"The Central Bank adopts the price based monetary framework in order to set a direction on interest rates which helps residents take good decisions in saving and investing their money in interest generating activities based on accurate information," Prof. Kigabo added.
Kigabo explained that nowadays, Rwandans invest their money in activities that they think they will get more interests from different from past times when some only saved their money in commercial banks.
He gave as an example where people now invest their money by buying treasury bonds among other investments.
Since the National Bank of Rwanda started issuing treasury bonds on the market, the participation of non-financial institutional investors in bonds has increased from 48.3 percent in December 2014 to 54.9 percent in July 2018. For retail investors in bonds, the participation has increased from 1.6 percent in December 2014 to 9.0 percent at the end of July this year.
How Rwanda benefits from adopting the price based monetary framework
When the financial sector of a country is growing, the price based monetary framework becomes very important in the financial and economic system.
For instance, when the National Bank of Rwanda, BNR, reduces its Key Repo Rate, it shows that commercial banks can get more profits in giving loans to loan seekers than doing trade with the Central Bank. This makes commercial banks invest in the population as they get profits which increases investment activities.
The Key Repo Rate is the rate at which the central bank lends to commercial banks.
When there is a lot of money circulating among the population that it can cause inflation, the Central Bank increases the key Repo rate and then commercial banks put their money to the Central Banks as they gain more profits there than in the population.
The price based monetary framework also helps commercial banks give loans to each other which helps them manage well their funds.
The sales of the treasury bonds also change due to the initial interest rate the Central Bank sets.
Prof Kigabo said that the price based monetary framework will help the citizens make the right investment choices basing on the profits they think they would get in.
"This will help enhance the saving culture and increase investments in Rwanda, which will benefit Rwanda in terms of economic growth," Prof. Kigabo noted.
Since December 2017, Rwanda National Bank’s key repo rate was reduced to 5.5 per cent up from 6 per cent.