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Another Policy Rate Hike Looms

As industry players panic

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Chancellor Kaferapanjira

Reserve Bank of Malawi (RBM) has hinted at another hike in the policy rate—the rate at which commercial banks borrow from the central bank as lender of last resort—an option likely to make cost of borrowing further high.

This will be the second time within three months after another policy rate adjustment was effected in May 2022 from 12 percent to 14 percent.

In its recent Market Intelligence Report, RBM says the recent 25 percent Kwacha devaluation and upward adjustment in domestic fuel prices effected on June 23 may exert further pressures on inflation outlook.

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“This may require that monetary policy be recalibrated to contain further deviations of inflation away from the medium-term objective,” the report reads.

In May this year, RBM raised the policy rate to 14 percent in what was seen as a desperate attempt to contain runaway headline inflation.

The policy rate remained stable, at 12 percent, the whole of last year when headline inflation was within a single digit band while the local unit, the Kwacha, was, on average, trading at K900 to the dollar.

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Last month, Bankers Association of Malawi (BAM) President Mcfussy Kawawa said RBM would be justified to raise the policy rate taking into account current economic trends.

The policy rate has been below headline inflation.

Kawawa, however, warned that the raise in policy rate would result in a heightened cost of borrowing as commercial banks will reciprocate.

Already, commercial announced a raise in their reference rate to 13.9 percent for the month of July.

In an interview, Malawi Confederation of Chambers of Commerce and Industry Chief Executive Officer Chancellor Kaferapanjira said, while a raise in policy rate would be inevitable, the option will heavily impact small and medium enterprises (SMEs).

“It will have an impact, especially on businesses that depend so much on borrowing and the majority are the SMEs; so, they will suffer most because larger corporates are able to negotiate interests,” Kaferapanjira said.

Since inflation reached 19.1 percent in May, economists have been pointing to a possible hike in the policy rate.

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