Experts back Reserve Bank of Malawi on maintaining policy rate
Economic experts have backed the decision by Reserve Bank of Malawi (RBM) to maintain the policy rate at 12 percent, saying it will help the economy recover from effects of the Covid pandemic.
The policy rate is the rate at which commercial banks can borrow money from their central bank as a lender of last resort.
A statement published by RBM’s Monetary Policy Committee (MPC) indicates that the committee decided to maintain the policy rate at 12.0 percent, Liquidity Reserve Requirement (LRR) ratio on domestic and foreign deposits at 3.75 percent and Lombard rate at 20 basis points above the policy rate.
“The decision was arrived at after considering the need to continue supporting economic recovery from the impact of the Covid pandemic while monitoring and managing risks to inflation.
“The MPC noted that the projected inflation rate is higher than the medium-term target of 5 percent on account of exogenous and mostly supply-side factors. However, to minimise policy trade-off and balance the efforts of managing inflationary pressures as well as supporting economic recovery, the committee decided to maintain the policy rate.
“Supported with active open market operations, the adopted monetary policy stance is expected to enhance production of import substitutes and general economic recovery without necessarily jeopardising the medium-term inflation target,” the statement reads.
In an interview, Economics Association of Malawi Executive Director Frank Chikuta said the move was understandable.
“We are just recovering from the effects of the pandemic; so, if the cost of financing increased, it would be a disruption to the recovery process,” Chikuta said.
Economics Professor at the University of Malawi Ben Kalua described the stance by the central bank as extraordinary.
“Normally, the trend is that when inflation is going up, all these rates should also be going up but this is extraordinary because RBM is trying to alleviate the impact of Covid and speed up business activity in the economy,” Kalua said.
Institute of Chartered Accountants in Malawi Chief Executive Officer Francis Gondwe added that the move would also cushion Malawians from a dwindling disposable income.
“People’s incomes have been affected in so many ways and to tighten would mean that the RBM would be punishing society and inflation could go up and, therefore, I would say that the central bank has made the right decision,” Gondwe said.
Another economist Collen Kalua said, though tricky, RBM should have considered reducing the rate to around 10 percent to enhance speedy recovery of the economy.
This means that the central bank has managed to maintain the policy rate at 12 percent the entire 2021.