The cost of borrowing continues to rise in the country following a 0.1 percentage point increase in the reference rate by commercial banks to 25.1 percent in June.
The reference rate is the interest rate at which commercial banks borrow and lend money to each other.
This is the second time commercial banks have increased the reference rate this year from 24.9 percent between January and April to 25 percent in May.
An increase in the reference rate leads to higher interest rates for consumers and businesses, making borrowing expensive.
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It is feared that in turn, the situation may in the long-run slow down economic growth as people and businesses may be less likely to take out loans.
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In an interview, Financial Market Dealers Association (Fimda) President Leslie Fatch said the upwards revision in the rate stems from a slight increase in the overnight interbank rate from 22.56 percent to 23.36 percent.
“What it means is that there is limited liquidity on the market. It also speaks to the fact that if such happens, the chance is the private sector credit will not grow as desired. But it is expected, at this point, to remember the Central Bank comes in to mop out excess liquidity so that there is limited money supply to manage consumer spending.
“If that is left unchecked usually what happens is it puts pressure on the exchange rate because we are going into an active season in our economy, where we have produced, farmers are selling and have cash at hand so, all that money ends in imports. So, it also puts pressure on the exchange rate,” Fatch said.
He added that between May and October, the Reserve Bank of Malawi (RBM) usually enters the market to remove excess liquidity.
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During the recent Monetary Policy Committee (MPC) meeting the RBM maintained the policy rate at 26 percent but raised the Liquidity Reserve Ratio (LRR) for domestic currency deposits by 100 basis points to 8.75 percent.
“In making this decision, the MPC took into account the recent deceleration in inflation and its continued downward projected trend in the near term. However, the Committee noted that there are upside risks to the inflation outlook, including the projected lower crop harvest, high money supply growth and higher global oil prices,” an RBM publish statement reads.
In an earlier interview, Malawi Confederation of Chambers of Commerce and Industry (MCCCI) President Wisely Phiri said the increase in LRR will adversely affect credit availability for businesses.
He said the high cost of borrowing which goes hand in hand with changes in policy rate has led to a significant decline in growth of private sector credit.
“The rise in LRR will force some banks to purchase temporary liquidity from the Reserve Bank which in turn will raise their costs. These costs will be passed to borrowers through increased interest rates. Banks have already adjusted their reference rate, further increasing the cost of borrowing and impacting on the levels of lending activities to the private sector.
“Businesses cannot expand without reasonably priced credit and this decline in private sector credit will lead to a decline in the level of investments which ultimately is costly to the economy in the medium to long term,” Phiri said.
