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Banks react to rate hike

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John Kapito

The cost of borrowing is expected to continue rising as commercial banks have adjusted upwards the reference rate—the benchmark for other rates— to 17.3 percent from 16.6 percent last month.

This comes weeks after the Monetary Policy Committee (MPC) of the Reserve Bank of Malawi (RBM) raised the policy rate, which is a key driver of interest rates on loans, from 14 percent to 18 percent.

This was the second time in five months for the MPC to hike the policy rate following another hike in early May from 12 to 14 percent.

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In separate statements, all the eight commercial banks in the country announced the adjustments.

Commenting on the development, Consumers Association of Malawi Executive Director John Kapito said the development means the cost of borrowing has increased for both individual and corporate customers.

Kapito added that this will increase the cost of production and pile more pressure on the purchasing power.

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“In an economy like Malawi, where consumer confidence is low and disposable income is a challenge, it becomes difficult for the industries because the demand will be very low, hence there will not be growth of the industries,” he said.

National Association for Small and Medium Enterprises General Manager Frank Tauzi said the adjustments would pile pressure on SMEs.

Tauzi said when the reference rate was lower, they were getting loans at 21 percent or more in interest rate and, with the reference rate at 17.3 percent, it means that the interest rates will be worse.

“Banks should introduce or sustain SME-friendly facilities and organisations like ours should also be more organised and provide guarantees on behalf of members; otherwise, the sector is doomed,” he said.

In its October Market Intelligence Report, the central bank said it continues to monitor developments around inflation rate movements and will take required action where necessary.

In a statement announcing the policy rate adjustment last month, RBM Governor Wilson Banda, who chairs the MPC, said the committee, during a meeting held on October 25, also resorted to keep the Lombard rate at 20 basis points above the policy rate and the Liquidity Reserve Requirement ratio on both domestic and foreign currency denominated deposits.

Banda said the decision was deemed necessary to restore price stability, which is essential for reviving and sustaining high economic growth.

The central bank governor said in taking this decision, the MPC noted that high inflation could frustrate the country’s economic recovery process while also eroding the purchasing power of households.

“In the absence of measures to contain inflation, rising prices will continue to diminish the welfare of households.

“The MPC, therefore, considered expeditious tightening of monetary policy stance as further delays could risk entrenching inflation expectations,” Banda said.

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