Interest rate pass-through in Rwanda

Abstract

This paper aims to assess whether there has been an improvement in the interest rate pass-through in
Rwanda following the adoption of a price-based monetary policy framework since January 2019, bearing in mind recent financial sector developments and improvements in monetary policy formulation and implementation. Empirical estimations based on the entire estimation sample1 show that there is incomplete but statistically significant long-run pass-through from the interbank rate, the repo rate, and the 13-week and 26-week T-bills rates to the deposit rates of 1, 2, 6, and 12 months, respectively. The estimations of the pass-through from policy rates to the lending rates are generally counter-intuitive, suggesting that the former are driven by other structural issues in the loan market, especially the banks’ high-cost structure and the loan market power. Our empirical estimations also show that the interest rate pass-through from various proxies of policy rates to the market rates has generally declined since January 2019 (Appendix B & table 5) compared to the sample before, and this can be attributed to the fact that the sample is still small yet the recent period has also been affected by shocks, notably COVID-19, the Russia-Ukraine war and domestic weather shocks. The main policy recommendation is that existing initiatives should be strengthened and new ones developed to help improve the Monetary Policy Transmission Mechanism.