Central Bank Raises Policy Rate to Combat Inflation
The Monetary Policy Committee (MPC) of the National Bank of Rwanda (BNR) recently increased the central bank policy rate by 50 basis points, bringing it to 7.25 per cent. This decision was made in response to persistent inflationary pressures that are expected to remain elevated for much of the year. The move aims to bring inflation back within the central bank’s target range of 2–8 per cent.
During a recent interview with The New Times Business Editor Julius Bizimungu, BNR Deputy Governor Nick Barigye explained the rationale behind the decision. He emphasized that the MPC’s actions are data-driven, and the decision to raise the policy rate was based on observed trends in inflation. In the fourth quarter of 2025, inflation stood at 7.4 per cent, and by January this year, it had risen to 8.9 per cent. With inflation exceeding the target band, the committee took preemptive action to prevent it from becoming entrenched or spiraling out of control.
Monitoring and Forecasting Inflation
At the last MPC meeting, the policy rate was maintained at 6.75 per cent. However, the committee identified several risks, including the impact of weather patterns on agricultural output and potential increases in administered prices. These risks have since materialized, influencing the current decision. Barigye noted that while the MPC cannot predict future decisions, it will continue to monitor economic developments closely and take further action if needed.
He also highlighted that monetary policy is not the only tool available to address inflation. Other government institutions are implementing measures in sectors such as agriculture and manufacturing to reduce dependency on external factors and improve sustainability. These efforts, combined with the central bank’s actions, are expected to contribute to a decline in inflation during the second half of 2026.
Impact of the Policy Rate Increase
The increase in the central bank policy rate is expected to influence interbank lending rates and, over time, affect lending and deposit rates. This transmission mechanism is crucial for achieving the goal of returning inflation to the target band. While some may worry about higher interest rates impacting economic growth, Barigye noted that these effects are likely to be moderated. Interest rates do not immediately follow the policy rate, and previous policy decisions have shown that borrowing rates can decrease in response to central bank actions.
Geopolitical and Economic Considerations
Geopolitical risks, particularly in the region, also play a role in the MPC’s decision-making process. Instability in neighboring countries, such as the Democratic Republic of the Congo, affects Rwanda’s export and import activities. However, global and regional inflation trends are showing signs of easing, which is a positive development. Additionally, expectations of declining global commodity prices could impact both exports and imports, affecting the balance of payments.
Exchange Rate Developments
Exchange rate developments were also considered in the decision to tighten monetary policy. Although the Rwandan franc depreciated by 4.4 per cent in 2025, this was influenced by multiple factors beyond the policy rate, including export performance, global dollar depreciation, tourism, and remittances. The central bank’s foreign exchange reforms have also played a role in stabilizing the currency.
Financial Sector Outlook
Barigye provided an overview of the financial sector’s performance, highlighting its continued growth and resilience. Total outstanding loans have reached RWF6.4 trillion, with key sectors such as construction, trade, manufacturing, and agriculture benefiting from increased lending capacity. The sector is also performing well in terms of profitability and liquidity, and there is a growing diversification in financial services.
Risks Facing the Banking Sector
Despite the positive outlook, several risks remain. Rapid digitization brings cybersecurity and fraud concerns, although strong risk-management protocols are in place. The insurance sector faces challenges related to rising receivables, and concentration risk remains a concern, with a large share of loans concentrated in a few sectors. Addressing this requires collaboration between the banking sector and government institutions to promote diversification and support underserved areas.
Addressing Concentration Risk
To mitigate concentration risk, the BNR is engaging with institutions like the Ministry of Agriculture to understand why certain sectors receive limited lending. By addressing concerns such as weather dependence through initiatives like irrigation and insurance, agricultural projects can become more attractive to lenders. Government programs, including those led by the Development Bank of Rwanda, can also provide incentives to encourage lending to underdeveloped sectors.
