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Mixed views on rate adjustments

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Wilson Banda

Experts have weighed in on last week’s policy rate adjustment by the Reserve Bank of Malawi (RBM)’s Monetary Policy Committee (MPC), doubting the stance’s possible effect in containing inflation pressure.

This is the second time the MPC is raising the policy rate within six months

In May this year, RBM adjusted the policy rate upwards to 14 percent from 12 percent in an attempt to arrest run-away inflation, which at the time was at 19 percent.

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Instead, headline inflation has remained on an upward spiral, hitting 25.9 percent in September.

This has left the central bank with no option but to further adjust the policy rate.

In the MPC statement, RBM said the committee noted that high inflation could frustrate the country’s economic recovery process while also eroding purchasing power of households.

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“In the absence of measures to contain inflation, rising prices will continue to diminish the welfare of households. The MPC therefore considered expeditious tightening of monetary policy stance as further delays could risk entrenching inflation expectations,” a statement from RBM reads.

But Financial Market Dealers Association (Fimda) says the decision will affect other productive sectors of the economy as the cost of borrowing goes high.

In an interview, Fimda President Leslie Fatch said while the decision aims at specific macroeconomic indicators, it affects the whole economy, including productive sectors, as things happened in 2012.

“The challenge is that if we pursue that line so much without taking into account the welfare of citizens, interest rate increases become detrimental,” Fatch said.

National Association for Small and Medium Enterprises (Nasme) is of the view that the adjustment to the policy rate is not in their best interest and not even in the interest of industrialisation in the country.

Nasme General Manager Frank Tauzi said when the rate was at 14 percent, interest on loans was around 21 percent, which he fears will further go up.

He added that, aside from defeating the industrialisation drive because new companies will not be established, the move does not arrest inflation in the country.

“Our inflation is imported; therefore, raising the policy rate only makes things worse. For example, when we are manufacturing products, 60 percent of the cost is imported materials for packaging. Therefore, whether loans are expensive here or not, if prices of those packaging materials rise, we will also raise prices of goods,” he said.

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