CHAPTER 4: RESEARCH FINDINGS
Introduction
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).
| 
