By Chimwemwe Mangazi:
The Reserve Bank of Malawi yesterday announced an upward adjustment of the policy rate by 200 basis points from 24 percent to 26 percent, a move likely to push up the cost of borrowing.
The policy rate remains a key driver of interest rates on loans and the upward adjustment will likely see commercial banks reciprocating by adjusting the price of loans.
This could exert extra pressure on most Malawians, according to economic experts, as it will induce further increase in commodity prices and deter investments, thereby slowing down growth.
This is the eighth time since April 2022 that the central bank has maintained a tight monetary policy stance in its desperate attempt to contain inflationary pressure as headline inflation has been rocketing.
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In a statement after the end of the first Monetary Policy Committee (MPC) meeting for 2024, RBM Governor Wilson Banda said the decision was on the pretext that inflation pressures have intensified, and the inflation path is set to remain elevated above the five percent medium-term target.
“The committee observed that the high inflation environment is not conducive for growth and therefore resolved that a monetary policy response is required to contain inflationary pressures and restore price stability,” reads the statement.
But the MPC maintains the Lombard rate—the interest rate charged by central banks when extending short-term loans to commercial banks—at 20 basis points above the policy rate and the LRR ratio at 7.75 percent for domestic currency deposits and 3.75 percent for foreign currency deposits.
The central bank governor maintains that the economy is set to rebound to 3.2 percent in 2024 from 1.5 percent last year.
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Reacting in an interview, economic expert and researcher Exley Silumbu said the decision was imminent.
“They will continue tightening [the monetary policy stance] as long as inflation rises. The pass-through effects of currency devaluation to inflation rate is not once but has lagged effects. What we saw was just the impact but there are accumulative effects over time,” Silumbu said.
In a separate interview, economist Edward Chilima said although the adjustments make economic sense, the reality is that it is a tough move for investors and borrowers.
“This makes life even tougher for business people. High cost of borrowing is not good for sustainable economic development. We need to address the underlying problem first, which is the price of maize. This is the root cause of inflationary pressures,” Chilima said.
Another economist Marvin Banda said the nation faces a paradox of having to be positively shocked by the latest decision, especially based on the past four consensuses on the policy rate.
