Balancing Act: How Rwanda’s Monetary Policy Aims to Tackle Income Inequality

Dr. Kalisa M. Thierry, the Chief Economist and Executive Director of Monetary Policy and Research at the National Bank of Rwanda, highlighted the importance of maintaining price stability in addressing income inequality.

He emphasized that the primary goal of monetary policy is to ensure a sound financial system by using various tools to achieve price stability. “Our mandate is to ensure a sound financial system and price stability, so we use monetary policy tools mainly to achieve price stability,” Dr. Kalisa stated.

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He delivered a speech on Wednesday, September 25, following Rwanda’s Central Bank Governor, John Rwangombwa’s presentation to the general public of the Monetary Policy and Financial Stability Statement (MPFSS), which provides an assessment of economic and financial developments for the first half of 2024 and an outlook for the rest of the year.

Dr. Kalisa explained that price stability is achieved when inflation is within a 2-8% balance, ideally at 5%, involving all economic actors, including lower-income individuals, as consumers and producers.

He said, “Price stability is defined by inflation within a balance of 2–8%, ideally at 5%. This level of inflation is the level that we consider low and stable, so in lower and stable inflation, all economic actors—including those with lower income—are the main consumers and the producers, which are at the same time the employers.”

He emphasized that low or negative inflation doesn’t stimulate production and employment, leading to over-macroeconomic stability and long-term economic growth. Monetary policy and inflation are all about addressing income inequality, thereby lifting low-income individuals to higher income levels.

Rwangombwa reported an 8.2% increase in the interbank rate during the first half of the year, followed by a 7.3% easing, aligning with the Central Bank of Rwanda’s reverse repo decision of 6.5 % in August.

He emphasized that the 15.6% lending rate cannot be solely attributed to monetary policy decisions. The decision to abandon monetary policy was made due to the market’s easing of commodity prices, which led to an increase in inflation to 5% in August.

Rwangombwa predicts inflation to average 5% in 2024 and 2025, potentially adjusting due to increased global geopolitical tensions and weather-related challenges.