Financial service consumers in the country will have to continue digging deeper into their pockets to service an existing or acquire a new loan from commercial banks following a further rise in reference rate.
The reference rate is the benchmark which commercial banks base when charging other interests such as interest rate when a person or businesses wants to borrow money.
According to statements which commercial banks have made in the country, effective tomorrow, the rate will be at 23.5 percent up from 22.4 percent last month.
For a good part of the year, commercial banks have been raising their reference rate on monthly basis, signalling an increase in the expense of servicing.
Twice within the year, the Reserve Bank of Malawi (RBM) has adjusted upwards its policy rate—the rate at which commercial banks borrow from the central bank as lender of last resort—to 24 percent.
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In a statement after its recent Monetary Policy Committee meeting, RBM said the adjustments were an attempt to contain price pressures which have intensified.
In an interview, Bankers Association of Malawi Chief Executive Officer Lyness Nkungula said banks were reacting to the decision by RBM to raise the policy rate.
“As the reference rate goes up, cost of funds will definitely go up and banks will have to cushion this by an increase in rates for lending products. It will be difficult to determine when Malawians should expect the rate to start falling again as it all depends on the policy rate direction,” Nkungula said.
Financial Markets Dealers Association (Fimda) President Leslie Fatch said the Lombard rate constitutes 64.8 percent of the variables that contribute to the reference rate, which means the reference rate cannot remain the same while policy rate has moved up.
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He indicated further that so long as the policy rate continues rising, the reference rate will continue following suit.
“The rise in reference rate means that the benchmark for pricing loans in the country is now aligning to the tight monetary policy stance taken by RBM as evidenced by increases in the policy rate,” Fatch said.
Consumer rights activists John Kapito of Consumers Association of Malawi, however, expressed worry at the development, indicating that, apart from biting borrowers, it will bite everyone else.
He said this is so because most businesses are funded by bank loans which means if the loans get expensive, businesses will pass the burden to consumers by increasing prices of their products.
In its recent Market Intelligence Report, RBM said the lingering effects of adverse climatic shocks, which are currently manifesting through rising food prices in developing economies, on account of food insecurity, spell doom.
“This therefore implies that the era of tight monetary policy stance will be longer in developing than in advanced economies,” the report reads.
The Malawi economy has been strolling with an inflation rate which is at 28.6 percent as of August this year.
