MONETARY POLICY COMMITTEE DECISION, OUTLOOK, AND RISKS
The Monetary Policy Committee (MPC) convened on May 29th, 2024, to review the impact of its previous decisions, evaluate recent global and domestic economic developments, and decide on the Central Bank Rate (CBR) for the next quarter. The inflation forecasts for May 2024 indicate a significant slowdown in headline inflation (y-o-y), mainly driven by eased inflation pressures from the global economy and improved domestic agricultural production. Headline inflation is expected to rise slightly in the near term but will remain within the 2-8 percent target range in the medium term. This reflects the impact of past monetary policy decisions by the National Bank of Rwanda, other government policies, and easing major international commodity prices.
Throughout the medium term, the anticipated decrease in year-on-year headline inflation mirrors the slowdown expected across its key components, namely core inflation, energy inflation, and food inflation. Pressures on core inflation are expected to remain in 2024 until 2025Q1, and then gradually reduce afterwards, primarily stemming from imported costs which are associated with the high import cost of production. This is likely to keep core inflation elevated in 2024, before a gradual decline in 2025.
Similarly, energy inflation pressures are anticipated to remain positive in 2024, before stabilizing in 2025. Over the policy horizon, energy inflation is projected to remain stable, consistent with the projected supply and demand conditions of energy products, leading to muted pressures on the domestic economy.
In contrast, food inflation is forecasted to ease in 2024 in line with the decline in international food prices, coupled with the expected normalization of domestic agricultural production and the positive impact of agricultural production for season A 2024, mainly for cereals.
However, there are three primary risks to the inflation projections:
1) Risks associated with international economic developments, particularly geopolitical tensions such as the Russia-Ukraine war, the Israeli-Hamas conflict, and the attacks in the Red Sea.
2) Export bans imposed by key exporting countries on essential commodities like sugar, oil, rice, and other cereals could exacerbate these risks.
3) Risks associated with adverse weather conditions that may negatively affect future agricultural production.
In line with the current developments and the outlook for both domestic and global economies, and considering the risks associated with the projected path of inflation, the Monetary Policy Committee (MPC) has decided to cut the Central Bank Rate (CBR) by 50 basis points, from 7.5 percent to 7.0 percent. This rate is deemed sufficient to keep inflation within the target range, assuming no unexpected events arise.
The Monetary Policy Committee will continue to closely monitor the potential risks that could affect the projected stable inflation path. Should these risks materialize and impact price stability, appropriate adjustments will be made to maintain inflation within the target band (2 to 8 percent).
II. CURRENT ECOOMIC CONDITIONS
SUMMARY
World economic growth is projected to stabilize in 2024, yet it is expected to remain below the historical annual average of 3.8 percent observed from 2000 to 2019, reflecting restrictive monetary policies and the withdrawal of fiscal support. Economic growth in advanced economies is projected to improve in 2024, with an upward revision to US growth and a recovery in the Euro area from low growth in 2023.
Global commodity prices are projected to decline in 2024, consistent with the slowdown in global demand. Both energy and non-energy commodity prices are projected to decline in 2024.
Globally, inflation is easing with a remarkable reduction in advanced economies but remains above pre-pandemic average of 3.5 percent in 2017-2019. The forecast was revised up by 0.1 percentage points relative to the January 2024 update, reflecting unchanged projections for advanced economies and an upside revision of 0.2 percentage points in Emerging Market and Developing Economies.
Despite the reduction in inflationary pressures, major central banks in advanced economies are still indicating the need for policy measures to bring inflation back to their desired targets. However, with the Federal Reserve's tighter monetary policy stance, the US dollar is appreciating against all other major currencies.
Rwanda's economy recorded strong growth in 2023, with real GDP growth averaging 8.2 percent and a notable increase of 10.0 percent in the fourth quarter. This robust performance was primarily driven by significant gains in the services sector, which grew by 13.1 percent due to booming tourism and strong information and communication activities, and the industry sector, which expanded by 12.5 percent, led by construction and manufacturing. Agriculture saw moderate growth despite adverse weather conditions. The momentum continued into the first quarter of 2024, supported by strong domestic demand and increased employment.
In 2023, Rwanda's current account deficit widened to 11.7 percent of GDP, mainly propelled by a rise in the trade in goods deficit, despite a rebound in service exports and steady inflows from remittances. On the financing side, there was a continuous increase in Foreign Direct Investment (FDI) inflows.
In 2024Q1, merchandise exports slightly rose by 0.2 percent compared to 2023Q1, given a relatively good performance in traditional exports and re-exports, which outweighed a temporary decrease in the demand for processed food items. On the other hand, merchandise imports increased by 5.9 percent, mainly due to an increase in capital goods and consumer goods amid sustained economic growth. Consequently, the trade deficit widened by 9.6 percent in 2024Q1. The widening current account deficit and higher import demand put pressure on the Rwandan franc, leading to a 2.08 percent depreciation against the USD by the end March 2024. Despite this, foreign exchange reserves remained adequate and are projected to cover at least four months of imports of goods and services in 2024.
Market rates increased, in line with the monetary policy stance. In the first quarter of 2024, the interbank rate rose to an average of 8.29 percent, an increase of 93 basis points from 7.36 percent in the corresponding period of 2023. Similarly, the average deposit rate increased by 64 basis points to 10.15 percent, while the average lending rate rose by 38 basis points to 16.35 percent. This reflects a higher share of long-term deposits and loans related to trade, personal borrowing, and mortgages.
Since the beginning of 2024, headline inflation has significantly decelerated, dropping to 4.7 percent in 2024Q1 from 8.9 percent in the previous quarter. This decline reflects decreases in core and fresh food inflation. Core inflation fell to 5.6 percent, driven by lower prices for some processed food items, while fresh food inflation dropped to 2.5 percent due to an improved supply of fresh vegetables. However, energy inflation rose to 2.7 percent, mainly due to increased solid fuel prices. Underlying measures of inflation also showed a broad based decrease, with mean inflation reducing from 7.0 percent to 6.3 percent in 2024Q1.
II.1. Global Economy and Financial Markets
The global economy remains resilient and is projected to stabilize in 2024.
According to the International Monetary Fund’s (IMF’s) World Economic Outlook (WEO) April 2024 projections, world economic growth is projected to remain at 3.2 percent in 2024. This projected growth remains below the historical annual average of 3.8 percent observed between 2000 and 2019, reflecting restrictive monetary policies and the withdrawal of fiscal support in many countries, as well as low underlying productivity growth. Relative to the January 2024 update, the forecast for 2024 is 0.1 percentage points higher, reflecting upgrades for the United States, India and Emerging Market, and Developing European
Economies.
Economic growth in advanced economies is projected to increase from 1.6 percent in 2023 to 1.7 percent in 2024. The upward revision of 0.1 percentage point relative to the January 2024 update, reflects an upward revision to US growth, and a recovery in the Euro area from low growth in 2023.
In the US, growth is projected to increase to 2.7 percent in 2024 from an estimated 2.5 percent in 2023, with an upward revision of 0.6 percentage points compared to the January 2024 update. This mainly reflects statistical carryover effects from the stronger-than-expected growth outcome in the fourth quarter of 2023 and the stronger momentum expected to persist in 2024.
Growth in the Euro Area is projected to recover from an estimated 0.4 percent in 2023 to 0.8 percent in 2024, reflecting relatively higher exposure to the war in Ukraine. Relative to the January 2024 update, growth has been revised downward by 0.1 percentage points, largely due to a carryover from the weaker-than-expected outcome for 2023. Stronger household consumption is expected to drive the recovery, as the effects of the shock to energy prices subside and a fall in inflation supports growth in real terms.
The UK’s economy is set to improve modestly from an estimated 0.1 percent in 2023 to 0.5 percent in 2024, as the lagged negative effects of high energy prices fade. It is also projected to rise to 1.5 percent in 2025, as disinflation allows financial conditions to ease and real incomes to recover.
Japan’s economy is projected to slow from an estimated 1.9 percent in 2023 to 0.9 percent in 2024, reflecting the fading of one-off factors that supported growth in 2023. These include a surge in inbound tourism.
Emerging Market and Developing economies are projected to remain broadly stable at 4.2 percent in 2024, reflecting an upward revision of 0.1 percentage point higher than the January 2024 update, following upgrades for some regions including, emerging markets & developing Europe. Low–income developing countries are expected to experience gradually increasing growth, from an estimated 4.0 percent in 2023 to 4.7 percent in 2024, as some constraints on near-term growth ease.
Concerning China, growth is projected to slow from 5.2 percent in 2023 to 4.6 percent in 2024, as the positive effects of one-off factors, including the post-pandemic boost to consumption and fiscal stimulus ease, and weakness in the property sector persists. Growth in India is projected to remain strong at 6.8 percent in 2024, reflecting an upward revision of 0.3 percentage points relative to the January 2024 update, with robustness reflecting continued strength in domestic demand and a rising working-age population.
In Sub-Saharan Africa (SSA), growth is projected to increase from an estimated 3.4 percent in 2023 to 3.8 percent in 2024, as the negative effects of earlier weather shocks subside and supply issues gradually improve. However, growth will remain below the historical average of 4.8 percent. The forecast remains unchanged relative to the January 2024 update, as the downward revision to Angola, due to a contraction in the oil sector, is broadly offset by an upward revision to Nigeria. Nigeria’s economy is projected to improve from 2.9 percent in 2023 to 3.3 percent in 2024, with an upward revision of 0.3 percentage points compared to the January 2024 update.
Economic performance in the East African Community (EAC-51) countries is projected at 5.4 percent in 2024, from an estimated 5.3 percent in 2023, following projected upward revisions for most member countries.
Commodity prices are projected to decline in 2024 due to slowing global demand.
In the first quarter of 2024, the global commodity price index decreased by 3.1 percent quarter-over-quarter, following a 1.2 percent decline in the fourth quarter of 2023. It is projected to fall by 2.5 percent in 2024, after dropping by 24.2 percent in 2023, reflecting slowing global growth amid tight financial conditions. The energy price index fell by 4.3 percent in 2024Q1,following a 1.8 percent decline in 2023Q4, driven by decreasing crude oil prices, which account for almost 85 percent of the global index. Annually, the energy price index is projected to drop by 2.7 percent in 2024, after falling by 29.9 percent in 2023, as subdued global growth reduces demand pressure.