Monetary policy stance is the posture or direction taken by a central bank to manage money supply, interest rates and other monetary instruments in order to achieve certain macroeconomic objectives.
It is either an expansionary stance, where the central bank typically employs measures like reducing interest rates to increase the money supply or a contractionary or tight stance where the bank takes measures to reduce money supply, increase interest rates or implement other restrictive policies.
In April 2022, the Reserve Bank of Malawi (RBM) adopted a tight monetary policy stance witnessed by a 200 basis points increase in the policy rate to 14 percent.
“In arriving at this decision, the committee noted that inflation pressures continue to mount following persistence of the pandemic-induced supply-demand imbalances, supply-chain disruptions, and rising global energy and food prices, which have been compounded by the Russia- Ukraine war,” an April 2022 published statement of the Monetary Policy Committee (MPC) reads.
In contrast, RBM had employed an expansionary stance in prior years as the policy rate declined to a record 12 percent in November 2020 and the rate was to be maintained until April 2022.
Since then, a tight monetary policy stance has manifested as the policy rate has taken an upward trajectory, reaching 24 percent in July 2023.
The main goal of a tight monetary policy is to combat inflation. By reducing the money supply and increasing interest rates, central banks aim to decrease demand and spending in the economy, which should lead to lower inflation rates over time.
But has this materialised in the Malawi situation?
In 2020, the policy rate declined from 13.5 percent in January to 12.5 percent in December. During that year, inflation averaged 8.6 percent with the lowest inflation rate recorded at 7.1 percent in September.
In 2021, the policy rate was maintained at 12 percent. However, inflation went on a surge and averaged 9.25 percent.
The following year, the policy rate jumped from 12 percent in January and closed the year at 18 percent and inflation was seen reciprocating and averaged 20.9 percent.
In the first half of 2023, the policy rate has already been raised twice, from 18 percent in February to 22 percent in April and recently to 24 percent. During the six-month period, inflation has averaged 27.5 percent.
In its recent statement, RBM indicates that inflation is expected to average 29.5 percent in 2023.
Such trends, evidently, show that as the policy rate is rising inflation follows suit. This is contrary to expectations of the central bank to combat inflation by increasing the policy rate.
A tight monetary policy stance is also expected to whet the appetite for borrowing in the economy.
However, according to the Financial and Economic Review, Volume 57 – Number 1 of 2023, published by RBM, commercial banks net credit to the central government increased by K118.6 billion to K1.4 trillion in the first quarter.
It further indicates that credit to the private sector declined by K17.3 billion and closed the first quarter of 2023 at K1 trillion, mainly on account of declines in commercial and industrial loans; and foreign currency denominated loans amounting to K60.5 billion and K9.9 billion, respectively.
“In particular, commercial banks’ holding of Treasury notes and Treasury bills increased by K128 billion and K120.2 billion to K1.5 trillion and K504.2 billion, respectively.
“This was, however, partially counteracted by accumulation of K14.9 billion government deposits at commercial banks to K107.7 billion in the quarter. Individual household loans and mortgages increased by K21.4 billion and K20.5 billion to K421.7 billion and K57.7 billion, respectively,” the report reads.
Comparatively, a similar report published in 2020 indicates that commercial banks’ net credit to the government increased by K46.8 billion to K733.2 billion at the end of the fourth quarter of 2020.
It further shows that annual growth rate of private sector credit slightly declined but remained strong at 15.2 percent from 16.4 percent recorded in the third quarter of 2020 and 21.3 percent registered in the corresponding quarter of 2019.
The developments underscore two factors in relation to the rise in policy rate. First is that as the policy rate and lending interest rates increase, they do not affect the appetite for borrowing for the government but does affect borrowing among private sector players.
Secondly, the government does crowd out the private sector as loans to the sector are seen declining when such developments happen.
In all, developments in the economy as stimulated by the tight monetary policy stance are such that the desired results, that is containing inflation and reducing borrowing, are not achieved.
It is imperative for the authorities to devise new ways of achieving the desired goals without stimulating inflation from movements in the policy rate.
