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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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4.2 Impact of monetary policy on Consumer Price Index (CPI)

In this study, we have used variables like Money supply, Nominal interest rate and the nominal exchange rate in order to measure the impact of monetary policy on Consumer Price Index (CPI). The monetary policy affects an economy by causing inflation which discourages production in the country. But before that, it is better to analyze the evolution of those variables in Rwanda such as: Consumer Price Index, Money supply, Nominal interest rate and the nominal exchange rate.

4.2.1 Evolution of CPI, money supply, Nominal interest rate and nominal exchange rate in Rwanda

This part of the study analyzes trends of different variables that are used in the following part of the study:

Table 1: Consumer price index (CPI) in Rwanda

 
 

1985

11.00181

1986

10.87891

1987

11.32854

1988

11.66598

1989

11.78383

1990

12.27708

1991

14.68795

1992

16.09218

1993

18.08027

1994

35.96796

1995

38.63368

1996

43.27568

1997

45.96313

1998

44.85729

1999

46.60651

2000

48.1645

2001

49.12422

2002

52.78382

2003

59.25022

2004

64.59108

2005

70.3286

2006

76.71494

2007

88.56351

2008

97.74297

2009

100

2010

105.6707

Figure 4: Consumer Price Index (CPI) in Rwanda

Source: Eviews7

As it can be seen, from 1985 to 2010, the CPI of Rwanda was generally increasing. This increase in is due to different causes which may be internal and external. The continual increase in prices discourages production of a given country. Normally, other things being equal, increases in domestic price discourage production while decreases in price encourage production.

Table 2: Money Supply in Rwanda

 

M2

1985

2.33E+10

1986

2.65E+10

1987

2.92E+10

1988

3.14E+10

1989

3.01E+10

1990

3.17E+10

1991

3.35E+10

1992

3.77E+10

1993

3.86E+10

1994

3.72E+10

1995

6.3E+10

1996

6.85E+10

1997

8.84E+10

1998

9.15E+10

1999

9.87E+10

2000

1.14E+11

2001

1.27E+11

2002

1.43E+11

2003

1.65E+11

2004

2.15E+11

2005

2.53E+11

2006

320972.6

2007

425211.5

2008

466146.4

2009

491194.6

2010

617709.7

Figure 5: Money Supply in Rwanda

Source: Eviews7

As it can be seen from the figure above, from 1985 up to 2005, the money supply was increasing but not significantly, but it decreased considerably in 2006, however, from that year, the money supply started increasing again. Normally, as it is known that, much money in circulation is most of the time associated with inflation but also; little money in circulation can be associated with problem. The central bank of Rwanda must have strong reasons of reducing money in such a way, may be because of inflation which was increasing significantly as seen in figure above.

Table 3: Nominal Interest Rate in Rwanda

 

NIR

1985

13.875

1986

14

1987

13

1988

12

1989

12

1990

13.16667

1991

19

1992

16.66667

1993

15

1994

16.77

1995

16.77

1996

18.54

1997

16.22

1998

17.13

1999

16.84

2000

16.99

2001

17.29

2002

16.37

2003

17.05

2004

16.48

2005

16.08

2006

16.07

2007

16.11

2008

16.51

2009

16.09

2010

16.67

Figure 6: Nominal Interest Rate in Rwanda

Source: Eviews7

From 1986 to 1989, the Nominal interest rate was decreasing. From 1989 up to 1991, it was increasing but it decreased gradually until 1993.

From 1995, the nominal interest rate was also increasing until 1996 and after that year, the interest rate in Rwanda almost stabilized in many years.

Normally, the high nominal interest rate is a sign of refusal by commercial banks to offer credits to borrower, most of the time, that results from the discount rate charged by the central bank to commercial banks. That desire is always associated by a desire of the central bank to reduce money in circulation and stabilize economy in order to avoid inflation. The low nominal interest rate is a sign that commercial banks are giving loans to those who need them and event is associated by the central bank which reduces the discount rate charged to commercial banks in order to increase money in circulation with a desire of stimulating production.

Table 4: Nominal Exchange Rate in Rwanda

 

EXCH

1985

101.2447

1986

87.59092

1987

79.46065

1988

76.44774

1989

80.14898

1990

83.7041

1991

125.1642

1992

133.9386

1993

144.237

1994

140.7038

1995

262.1823

1996

306.82

1997

301.5298

1998

312.3141

1999

333.9419

2000

389.6962

2001

442.9919

2002

475.3652

2003

537.655

2004

577.449

2005

557.8226

2006

551.7103

2007

546.955

2008

546.8487

2009

568.2813

2010

583.1309

Figure 7: Nominal Exchange Rate in Rwanda

Source: Eviews7

From 1985, the Rwandan currency was being appreciated, but from 1988, it started depreciating in general and it became almost stable from 2005 up to 2007. From 2008, the Rwandan currency was generally depreciating.

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