By Justin Mkweu:
Global economic think-tank, the Economist Intelligence Unit (EIU), has predicated an upward adjustment in the policy rate—the rate at which commercial banks borrow from the central bank as lender of last resort—in the country.
Any movement on the policy rate would have a bearing on the cost of borrowing in commercial banks.
The Reserve Bank of Malawi (RBM)’s Monetary Policy Committee (MPC), which is responsible for determining the rate, is expected to meet at the end of the month.
At its previous meeting held in August, the MPC maintained the policy rate at 14 percent, which is way above headline inflation, seen at 25.5 percent in August 2022, which has attracted heated debate among economists.
But the EIU, as quoted by portfolio management and advisory firm Bridgepath Capital Limited in its September Monthly Economic Report, says it expects a further tight monetary policy stance by the central bank.
“Real short-term interest rates, which are negative in 2022, are expected to turn positive in 2023 in line with monetary policy tightening,” the report reads.
RBM revised upwards the policy rate to 14 percent in May this year from 12 percent.
The central bank indicated that the move was aimed at arresting runaway inflation, which by then was at 19.1 percent, from 15.7 percent in the preceding month.
Ironically, headline inflation has remained on an upward spiral over the past months due to rising food and non-food prices.
The rise is expected to continue in the remaining part of 2022, experts say.
Economist from the Centre for Research and Consultancy Milwad Tobias said commercial banks are likely to be impacted by the widening gap between headline inflation and the policy rate.
“It is a norm that interest rates should be above inflation rate and if the opposite happens, it means businesses such as banks will be making losses because real interest rate is the rate minus inflation and the result must be positive,” he said.
In an interview last week, RBM Governor Wilson Banda said the MPC will meet soon and scrutinise the validity of the current stance on policy rate, among other things.
“Our primary responsibility, as mandated by the law, is price stability but there are other things that can lead to price stability including the growth of the economy and we do not want to take a decision in response to transitory issues,” he said.
Malawi’s economy is facing heavy threats emanating from both external and internal shocks.
The country has been faced with acute shortage of foreign exchange, leading to scarcity of fuel, factors that accelerated inflation.
Justin Mkweu is a fast growing reporter who currently works with Times Group on the business desk.
He is however flexible as he also writes about current affairs and national issues.