Borrowers in Rwanda will have to brace for more expensive credit after captains of the financial sector say interest rates are set to increase as the sector wrestles with biting inflationary pressures.
Central Bank Governor John Rwangombwa ruled out any possibilities of interest rates cut, blaming this on prevailing economic conditions .
“With the current situation with the inflationary pressures, interest rates are expected to be higher. The good thing is they haven’t yet gone up as of now; we monitor on a weekly basis” said Rwangombwa.
He said individual banks would determine the interest rates they charge, but the expectation is that the pressure will ease by the second half of next year.
“Each bank will look at its pricing model, look at the impact of this high inflation.”
“Depending on the appetite of the boards of these financial institutions one might decide not to increase the interest rates and maybe slightly eat into their profitability as we expect this to smoothen out... Let’s just hope that the increase in interest rates will not be too high,” said Rwangombwa.
Bank customers have been pushing for reduction of interest rates, which are among factors they blame for failure to pay back their loans. Commercial banks in Rwanda charge as high as 17 percent to 20 percent interest on loans.
Headline inflation in the first half of 2022 increased to 9.0 percent on average compared to 1.4 percent recorded in the first of 2021 and and 0.3 percent in the second half of 2021, according to central bank figures.
This surge was driven by a sharp spike in fresh food inflation, which rose to 10.2 percent in half one of 2022 from -1.1 percent in half one of 2021.
Energy inflation increased to 14.8 percent from -0.1 percent, while core inflation surged to 8.1 percent in 2022 from 2.2.
Headline inflation peaked at 15.9 percent in August, while core food inflation increased to 18.4 percent from 3.4 percent at a similar period last year.
Mukinisha Laurent, a businessman in Kigali, said increasing interest rates at a time when businesses are beginning to get back on their feet, will hurt recovery.
“Credit is already expensive. Increasing interest rates at a time like this is harsh. It’s bad economics because this is the time we need all the easing we can get,” he said.
It is common for interest rates to spike as inflation soars as lenders demand higher compensation for the decrease in purchasing power of the money they will be paid in future.
Raising interest rates is also used to control inflation, where the higher cost of borrowing is used to subdue demand and slow down spending.
The central bank can raise its policy rate -- the rate they charge banks on deposits. In turn commercial banks pass on a portion of these higher rates to customers.
In August the central bank raised its key repo rate to six percent. It was the second Interest rate hike this year, bringing borrowing costs to the highest since November 2017.
It is expected that the new repo rate will soon be reflected in increased interest rates by commercial banks World annual average inflation is projected to increase to 8.3 percent in 2022, from 4.7 percent in 2021 on food and energy prices as well as persistent supply-demand imbalances.