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The impact of monetary policy on consumer price index (CPI): 1985-2010

par Sylvie NIBEZA
Kigali Independent University (ULK) - Master Degree 2014

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This chapter presents the findings from the research carried out on impact of monetary policy on Consumer Price Index (CPI) from 1985 to 2012. The researcher attempted to analyze the data in order to answer to the research questions set at the beginning of this study.

This chapter has two parts: strategies of monetary policy in stabilizing economy and impact of monetary policy on Consumer Price Index (CPI).

4.1 Strategies of monetary policy in stabilizing economy

The National Bank of Rwanda uses different tools of monetary policy in order to stabilize economy. It uses them in attempting to achieve the objectives of the monetary policy. With those tools, money supply, credit, interest rates and other monetary variables can be manipulated by the Central bank of Rwanda in order to achieve predetermined policy goals.

4.1.1 Open market operations

This refers to purchase and sales of government securities in the money market. When the Central bank wants to reduce money supply or credit availability, it sells the securities to the public. On the other hand, if the Central bank wants to increase money supply and credit availability, it buys securities from the public. This avails money to the public for economic activities. In so doing, the Central bank controls inflationary and deflationary pressures (Assiimwe H. M., 2009:192).

In Rwanda, the Central bank accepts surplus liquidity from banks and in return it transfers eligible securities to them as collateral. The two parties agree to reverse the transaction at a future point in time, when the Central bank as borrower repays the principal of the loan plus interest and the creditor bank returns the collateral to the Central bank. The duration of these operations can vary between 1 to 14 days. Repos with shorter maturities are executed from time to time depending on the forecasts of banking sector liquidity. Owing to the systemic liquidity surplus in the Rwanda banking sector, repo tenders are currently used exclusively for absorbing liquidity (implementation of monetary policy by National Bank of Rwanda 2010).

The bids are ranked using the Duch auction procedure. Those with the lowest interest rate are satisfied as having priority and those with successively higher rates are accepted until the total predicted liquidity surplus for the day is exhausted.

If the volume ordered by the banks exceeds the predicted surplus, the Central bank either completely refuses the bids at the highest rate or reduces them pro rata.

Repo tenders are usually announced on Friday after the Monetary Policy Committee`s meeting and on another working day banks can bid for 1-day repo at around 2:00 PM. Banks may submit their orders the amounts of money and the interest rates at which they want to enter into transactions with the Central bank- within a prescribed time. The minimum acceptable volume is RWF 50 million. Bids exceeding the minimum must be expressed as multiples of RWF 50 million (implementation of monetary policy by National Bank of Rwanda2010).

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