As Claver Gatete marks his first year in office as Governor of the National Bank of Rwanda, he is faced with the task of crafting new monetary interventions to tame Kigali’s spiralling cost of living.

On Friday, the central bank’s Monetary Policy Committee maintained the key repo rate at 7.5 per cent (last changed in May), and the governor said the decision was based on the fact that in general, inflationary pressures are easing since global fuel and major commodity prices are declining, and regional inflation for this quarter is expected to remain moderate.

“The situation is stabilising though there are still some challenges in the euro zone. But most importantly, the pressures from regional inflation are coming down — this is giving us some comfort that imported inflation is going to come down,” he said.

Consumer prices in Rwandan urban centres rose 1.41 per cent in May, driven by food prices and utilities bills, pushing the year-on-year inflation rate to 8.32 per cent, up from 6.95 per cent. The all-Rwanda index increased by 10.79 per cent in May compared with 9.92 per cent in April.

“When inflation goes up, the standard monetary policy response is to increase interest rates,” Sanjeev Anand, vice chairman of the Rwanda Banker’s Association, told The EastAfrican.

Mr Anand, who is also the managing director of Commercial Bank of Rwanda (BCR), said while the Rwandan economy’s prospects remain largely bright, rising inflation poses significant risks. “The first half this year was more active than the previous year — bank lending has increased tremendously. Inflation and the exchange rate have to be kept in mind — if these two get out of hand, it could affect growth,” he said.

In June, the International Monetary Fund warned that though Rwanda’s growth is expected to remain high in 2012, risks remain, as a global slowdown or higher world fuel prices could threaten growth, revenue, and inflation objectives.

However, businesses are concerned that the rising costs of goods and services will make it difficult to do business. “Our suppliers have signalled their intention to increase prices. We will have no option but to raise our prices, because we have to maintain our profit margin,” said Adan Ramata, country manager of Nakumatt Rwanda Ltd.

This month, electricity costs for both businesses and households will increase by 20 per cent, the biggest increment in the past seven years, following a government decision to reduce power subsidies.

Analysts say Rwanda’s rising inflation is “worrying,” given that in Kenya and Uganda there has been some moderation in inflationary tendencies in the first quarter of 2012, albeit still at levels considerably higher than in Rwanda.

“The Kenyan and Ugandan currencies have recovered some of the ground lost in 2011, in terms of a quite sharp depreciation of their exchange rates, which fed into higher prices for imported goods. As their exchange rates have appreciated, the prices of imported goods have subsided.

Rwanda is actually confronted with the converse situation at the moment, with a weakening of the franc, something which might feed into still higher imported inflation over the coming months,” said Andrew Mold, head of macroeconomic and social policy analysis at the Sub-Regional Office for Eastern Africa Of the United Nations Economic Commission for Africa based in Kigali.

Higher demand for the dollar to finance imports has seen the Rwanda franc fall to a record low in six months. The franc depreciated by 1.4 per cent against the dollar between December 2011 and June 28 this year.

The first five months of this year have seen Rwanda’s import bill swell by 32 per cent against the 14.5 per cent growth recorded in the same period last year.

As of Thursday last week, the franc was buying at Rwf620/$1 and selling at Rwf630/$1, in comparison with a week earlier when it was trading at Rwf617/$1 (buying) and Rwf616/$1 (selling).

“Inflation has not yet reached the kind of levels where it will impact on growth performance, but that does not mean that the government should not monitor trends closely,” Mr Mold said. Consumers are also starting to feel the pinch. For instance, early this year, Bralirwa, Rwanda’s biggest local brewery and soft drinks maker brewer, increased prices for soft drinks citing increased transportation and raw materials costs, the first increment since 2008.

The retail price of its soft drinks was increased to Rwf300 ($0.50) from Rwf250 (0.41) per bottle.

“Inflation is still a concern — it now at 8.32 per cent, more than we projected. It will be reflected in everything, because our costs of fuel and electricity will go up,” said Jan Van Velzen, Bralirwa’s commercial director.