Charles Chuka justifies policy rate hike

Reserve Bank of Malawi governor Charles Chuka on Friday justified last Wednesday’s Monetary Policy Committee decision to hike the cost of borrowing, saying the economy is passing through tough times that need sacrifices.

The MPC on Wednesday hiked the policy rate by 200 basis points from 25 percent to 27 percent, a development which will likely force commercial banks to raise base lending rates.

The decision by the MPC took place against a backdrop of persistently high inflation, depreciating exchange rate, as well as uncertainties on food prices and wage demands.

The move by MPC sent shockwaves among business operators on Thursday as they feared that high cost of borrowing is likely going to suffocate local businesses.

But speaking in an interview on the sidelines of a Bankers Association of Malawi annual dinner and dance in Blantyre, Chuka said there are a number of sacrifices that need to be made before the economy gets better, adding that high interest rates is one of them.

“The expression of displeasure from other quotas is obvious as we have had high interest rates for more than three years now.

“I am impressed that we still have a good number of operators still doing business because you can only do business in an advent of high interest rates when you have enough capital,” said Chuka, who is MPC Chairman.

He pointed out that the time the economy is going through is not for investment but for sacrifices.

Chuka noted that the economy has gone through a number of challenges since 2012 such as the devaluation, cash gate, drought and floods, early this year.

“As you know the kwacha was devalued in 2012 but soon after that we had the cashgate, then we had drought and then floods. All these things meant that government had to operate at a different level. The amount of borrowing that was necessitated by that for government to intervene in the community to provide resources for the people it meant that they had to borrow money and that money fuels inflation.

“It was not a choice that they had to make for nothing, they knew they had to save people’s lives and we knew also that it would lead to inflation. And it is that inflation that we are dealing with now and that and that high debt that is out there that is demanding high interest rates,” said Chuka.

He noted that one cannot roll over high debt at low interest rate.

“It is not possible, so these high interest rates and high inflation are going to be with us for a while until we take real action,” he said.

He was quick to point out that government has started taking positive steps to arrest inflation and hoped that things will improve in the short to medium term.

Speaking in an interview earlier, Bankers Association of Malawi president Misheck Esau said although the rate hike was expected due to the prevailing high inflation, it is a disappointing development.

“We are very disappointed because we believe that for this economy to grow, interest rates have to come down.

“An economy where interest rates stick up like the way they have done for the past three years since 2012, it’s too much for the business community t take it,” said Esau.

Before the policy rate hike, commercial bank base lending rates hovered around 33 percent. This meant that borrowers were paying around 38.5 percent in interest on loans.

Following the policy rate hike, borrowers should expect to cough interest of above 40 percent.