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Interest movement affects share prices

Betchani Tchereni

A study by the Malawi University of Business and Applied Sciences shows that interest rate changes significantly affect stock prices on the local bourse, the Malawi Stock Exchange.

The movement also has had a bearing on the gross domestic product (GDP) growth trajectory, according to the study.

The study, titled ‘Effectiveness of the Asset Price Channel as a Monetary Policy Transmission Mechanism in Malawi: Evidence from Time Series Data’, has since been published by the International Journal of Economics and Financial Issues (IJEFI).

Among other things, the study found that interest rates declined during the period under review, whereas both stock prices and per capita income showed a positive trend.

The average value of interest rates in Malawi was 21.1 percent with a standard deviation of 11.7 percent, indicating that there was great interest rate volatility during the study period, but the average value of the stock price index was 8,433 while that of per capita GDP was about $38 per month.

One of the researchers, Associate Professor of economics Batchani Tchereni said that expansionary monetary policy, which in effect implies cutting interest rates, has a transmission mechanism of increases in stock prices as investors channel their resources to the stock market away from interest-bearing assets.

“Through this process, wealth increases and national income rises. National income also rises because the cut down of interest rates assists in increasing investments which, of course, in our study, was statistically insignificant.

“Monetary policy in Malawi does matter, mostly through the wealth creation channel,” Tchereni said.

The study recommends that the Reserve Bank of Malawi (RBM) intensifies financial literacy and educational activities to the wider public to develop a culture of saving and investment.

It further recommends that the stock should initiate an intensive promotional campaign aimed at engaging both corporate and individual investors to discuss their concerns over the investment process and incorporate them in its policies and operations.

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