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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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