Country Experiences - Rwanda

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Kigali, Serena Hotel, July 20th, 2012

INTERNATIONAL CONFERENCE ON

MONETARY POLICY FRAMEWORKS IN DEVELOPING COUNTRIES:

PRACTICE AND CHALLENGES

EXPERIENCE OF RWANDA


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OUTLINE

I. BNR MONETARY POLICY BACKGROUND

II. MONETARY POLICY FRAMEWORK

III. MONETARY POLICY INSTRUMENTS

IV. MONETARY POLICY COMMUNICATION STRATEGY

V. POLICY COORDINATION: DEAL WITH SUPPLY SHOCKS

VI. ACHIEVEMENTS

VII. CHALLENGES

VIII. WAY FORWARD

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I. BNR MONETARY POLICY BACKGROUND

BNR is an independent Central Bank

Main missions of the BNR:

Ensure and maintain price stability; Enhance and maintain a stable and competitive

financial system without any exclusion;

Support Governments general economic policies,

without prejudice to the two previous missions.

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BACKGROUND (CTD)

To achieve its mission, BNR shall :

Define and implement the monetary policy;

Supervise and regulate the financial sector: banks,microfinance institutions and pension funds

institutions;

Supervise and regulate payment systems.

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BACKGROUND (CTD)

BNR monetary policy framework can be grouped

into 3 distinct time periods:

1964-1990: use of direct monetary instruments;

1990-1995: transition to financial liberalization

Since 1995: Use of indirect monetary policyinstruments

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BACKGROUND (CTD)

In this presentation, we focus on the BNR experience

in monetary policy formulation and implementationduring the recent period ( 1995-2012)

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MONETARY POLICY FRAMEWORK

Current Monetary Policy Framework: monetary

targeting regime, since 1995

Nominal anchor: Broad money, M3

Operating target: Reserve money

Ultimate objective: Price stability

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MONETARY POLICY FRAMEWORK (CTD)

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Instruments Intermediate target Primary objective

Feedback Long run stable relationship

Price StabilityMonetary

aggregates

Base Money orinterest rate

The monetary pol icy transmission mechanism can be il lustrated as

fol low (from the quantity of reserve money to inflation):


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MONETARY POLICY FRAMEWORK (CTD)

Formulation and implementation framework:

Annual monetary programs under PSI since 2010 following

PRGF;

Key assumptions:

Stability and predictability of money multiplier

Stability of money demand: link between M3 and inflation

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MONETARY POLICY INSTRUMENTS

Open market operations:

Repos: for liquidity absorption;

Reverse-Repos: for liquidity injection;

Key Repo rate (KRR) is the central bank rate: its change is decidedby the Monetary Policy Committee ( MPC)

T-bills (4 weeks, 13 weeks, 26weeks and 52 weeks);

Lending and deposit standing facilities

Discount window (KRR+4%) Reserve Requirements

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MONETARY POLICY COMMUNICATION STRATEGY

Since 2010, BNR has significantly improved itsmonetary policy communication strategy with thepublic.

Main objectives: Influence economic agents expectations;

engage the public support for the long run goal ofprice stability;

Increase the transparency and accountability of BNR.

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Tools of communication strategy: Communication of MPC decisions: briefing to MDs

of banks, press release, press conferences,publications, etc

Monetary policy and Financial Stability Statementby the Governor (in Kigali and provinces):

At the beginning of the year: Assessment of theprevious year and announcement of the programme

of the year. A mid term review: to assess the achievement after the

first half of the year.

Financial awareness campaign

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MONETARY POLICY COMMUNICATION STRATEGY (CTD)


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POLICY COORDINATION: DEAL WITH SUPPLY SHOCKS

To achieve its goal of price stability BNR has played animportant role in:

Bringing on board key stakeholders involved in

economic management to coordinate policies andactions to mitigate the impact of supply shocks oninflation.

Strengthened coordination between monetary and fiscal

policies by a joint BNR/MINECOFIN TreasuryManagement Committee

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ACHIEVEMENTS

BNR monetary policy has contributed to achieve low

and relatively stable inflation

Chart 1:Link between M3and inflation (overall stability of money demand)

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ACHIEVEMENTS (CTD)

Link between Reserve money and M3: BNR controls M3

through Reserve Money.

Chart 2: Stability of the money multiplier

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0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

rm m3


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VI. ACHIEVEMENTS (END)

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-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Feb-95

Jul-95

Dec-95

May-96

Oct-96

Mar-97

Aug-97

Jan-98

Jun-98

Nov-98

Apr-99

Sep-99

Feb-00

Jul-00

Dec-00

May-01

Oct-01

Mar-02

Aot02

Jan-03

Jun-03

Nov-03

Apr-04

Sep-04

Feb-05

Jul-05

Dec-05

May-06

Oct-06

Mar-07

Aug-07

Jan-08

Jun-08

Nov-08

Apr-09

Sep-09

Feb-10

Jul-10

Dec-10

May-11

Oct-11

Mar-12

var RM var M3

Chart 3: M3 and Reserve money, monthly changes


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VII. CHALLENGES

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Since recently, there is indication of instability of money

demand and money multiplier ( in short term);

Weak monetary transmission mechanism and important

lag in the relationship between money supply and prices ; Dominance of currency in circulation out of BNR (70.0% in

average) in the Reserve Money;

Financial sector not yet well developed.


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VIII. WAY FORWARD

Introduction of flexibility in the monetary targeting

regime, such as a range of targeted aggregate instead

of a fixed level.

Development of the Financial sector to improve thetransmission mechanism;

Development of payment systems to reduce the level of

currency in circulation out the banking system;

Increase the BNR capacity in policy oriented researches.

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THANK YOU FOR YOUR KIND ATTENTION

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Country Experiences - Rwanda