INTERNATIONAL CONFERENCE ON

MONETARY POLICY FRAMEWORKS IN DEVELOPING COUNTRIES:

PRACTICE AND CHALLENGES

EXPERIENCE OF RWANDA

Kigali, Serena Hotel, July 20th , 2012

OUTLINE
2

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

I. BNR MONETARY POLICY BACKGROUND

3

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.

BACKGROUND (CTD)
4

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.

BACKGROUND (CTD)
5

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 policy
instruments

BACKGROUND (CTD)
6

In this presentation, we focus on the BNR experience

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

MONETARY POLICY FRAMEWORK

7

Current Monetary Policy Framework: monetary

targeting regime, since 1995
Nominal anchor: Broad money, M3
Operating target: Reserve money
Ultimate objective: Price stability

MONETARY POLICY FRAMEWORK (CTD)

8

The monetary policy transmission mechanism can be illustrated as

follow (from the quantity of reserve money to inflation):

Instruments

Intermediate target

Base Money or
interest rate

Monetary
aggregates
Feedback

Primary objective

Price Stability

Long run stable relationship

MONETARY POLICY FRAMEWORK (CTD)

9

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

MONETARY POLICY INSTRUMENTS

10

Open market operations:

Repos: for liquidity absorption;
Reverse-Repos: for liquidity injection;
Key Repo rate (KRR) is the central bank rate: its change is decided
by 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

MONETARY POLICY COMMUNICATION STRATEGY

11

Since 2010, BNR has significantly improved its

monetary policy communication strategy with the
public.
Main objectives:
Influence economic agents expectations;
engage the public support for the long run goal of
price stability;
Increase the transparency and accountability of BNR.

MONETARY POLICY COMMUNICATION STRATEGY (CTD)

12

Tools of communication strategy:

Communication of MPC decisions: briefing to MDs
of banks, press release, press conferences,
publications, etc
Monetary policy and Financial Stability Statement
by the Governor (in Kigali and provinces):
At the beginning of the year: Assessment of the
previous 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

POLICY COORDINATION: DEAL WITH SUPPLY SHOCKS

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To achieve its goal of price stability BNR has played an

important role in:
Bringing on board key stakeholders involved in
economic management to coordinate policies and
actions to mitigate the impact of supply shocks on
inflation.
Strengthened coordination between monetary and fiscal
policies by a joint BNR/MINECOFIN Treasury
Management Committee

ACHIEVEMENTS
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BNR monetary policy has contributed to achieve low

and relatively stable inflation

Chart 1: Link between M3 and inflation (overall stability of money demand)

ACHIEVEMENTS (CTD)
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Link between Reserve money and M3: BNR controls M3

through Reserve Money.

Chart 2: Stability of the money multiplier

8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06
rm

Dec-07
m3

Dec-08

Dec-09

Dec-10

Dec-11

-5.0

-20.0

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
Aot 02
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

VI. ACHIEVEMENTS (END)

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Chart 3: M3 and Reserve money, monthly changes

25.0

20.0

15.0

10.0

5.0

0.0

-10.0

-15.0

var RM
var M3

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.

VIII. WAY FORWARD

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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 the
transmission 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