Central banks raise lending rates to manage inflation

August 17, 2022

The war between Russia and Ukraine has taken a toll on the Rwandan economy, leading to a sharp increase in the prices of imported commodities including oil, gas, fertilisers, and sunflower seed oil.

And, in spite of a subsidy, Rwanda raised the price of fuel this week. This is in addition to a drop in domestic food supply linked to climate change, and increased prices of inputs leading to higher cost of food.

On Thursday, Rwanda’s central bank raised its lending rate by 100 basis points to six percent from five percent, to tackle inflationary pressures, mitigate the impact on consumers and support economic recovery.

According to the central bank’s rate-setting Monetary Policy Committee, the recent increase in prices is causing concern with year-on-year inflation soaring to 15.6 per cent in July, up from 12.6 per cent in June, well above the 0.8 percent average inflation rate recorded last year.

The central bank attributes the sharp rise to imported goods, mainly fuel, a poor harvest due to unfavourable weather, and an increase in prices of imported agricultural inputs.

“This [inflation] is a big concern for us. We are talking to other government agencies to intervene. Inflation is expected to remain high over the next three quarters and start easing in the second half of 2023 when the headline inflation converges towards the five percent benchmark,” central bank governor John Rwangombwa told a press briefing on Thursday announcing the MPC decision made on August 9.

“This decision is mainly aimed at limiting second-round effects from higher imported prices due to global shocks,” he said without ruling out a further tightening of the policy if inflationary pressures remain high.

“The MPC remains committed to its objective of price stability,” he added. Economic growth is expected to drop to six per cent, from 10.2 per cent in 2021.

Uganda’s central bank raised its main lending rate by another 50 basis points to nine per cent on Friday, and signalled that it could tighten policy further if inflationary pressures persist.

The Bank of Uganda has now raised the rate by 250 basis points this year to tame inflation. Consumer prices have been driven higher by soaring fuel and food costs that the government has blamed on the after-effects of the Covid-19 pandemic and the war in Ukraine.

According to economists polled by The EastAfrican, the current wave of inflation in the region is not caused by an excessive supply of money but rather is cost driven by exogenous factors beyond the control of central banks, requiring the application of fiscal policies.

“Inflation also reduces real money balances, which will lead to a depreciation of the local currencies,” said Reginald Kadzutu, chief executive, Amana Capital Ltd.

According to the Central Bank of Kenya’s latest Financial Sector Stability Report, participation by all EAC countries in the Debt Services Suspension Initiative by the G20 countries eased fiscal pressures on governments.

“There is also concern about rising concentration risk as a result of banks holding most of their assets in government securities and lending to a few sectors of the economy,” the bank said.


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