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Nico expects policy rate kept at 16%

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Nico Asset Managers expects the policy rate to be maintained at 16 percent in the short-term.

But the firm projects that authorities may decide to reduce the rate further in the event that inflationary pressures decline and the country realises a good harvest.

The sentiments are contained in the 2017 Annual Economic Report Nico Asset Managers published recently.

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However, combined effects of prolonged dry spells and the outbreak of Fall Armyworms are posing a threat to agricultural output.

Former Bankers Association of Malawi (Bam) President and CDH Investment Bank Chief Executive Officer, Misheck Esau, however, said he anticipates the policy rate to go down further to 13 percent.

He said at current levels, interest rates are not low enough to spur rapid economic growth, with the government remaining the dominant borrower at very high interest rates.

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Esau said with inflation at 7.1 percent, one needs a plausible explanation as to why the gap between inflation and policy rate should be so wide.

“I expect a further cut in the policy rate. The economy needs to benefit from the fall in inflation through a low interest rate environment, going forward,” Esau said.

In the report, Nico said low lending rates will keep the cost of borrowing low and if households are encouraged to borrow, there will be high demand for goods and services in the economy, which will, in turn, increase inflation rates through a rise in prices.

“This may also lead to higher property values as demand improves by low mortgage rates. The low cost of borrowing results in lower default risk of existing liabilities and higher demand for credit,” the reports reads.

As of January 2017, the policy rate was at 24 percent and was later reduced to 22 percent in March 2017 and 18 percent in July 2017.

These adjustments led to subsequent reductions in base lending rates for commercial banks averaging 27.55 percent as of December 2017 compared to 33.73 percent in December 2016.

Despite the reduced base lending rates, interest rates are still high, which is a reflection of the low levels of competition and increased credit risks in the banking sector.

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