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Policy rate down to 18 percent

In what could be described as a pleasant Independence Day gift to Malawians, the Reserve Bank of Malawi (RBM) Monetary Policy Committee yesterday slashed the indicative cost of money, technically known as policy rate, by 400 basis points from 22 to 18 percent.

This is the second time the monetary authorities have slashed the policy rate this year, following a 200 basis points reduction early this year.

This should be great news to Malawians who have been struggling in an environment of high interest rates which made borrowing for investment almost impossible.

In a statement yesterday, RBM Governor, Dalitso Kabambe, further said the committee arrived at the decision following a sharp fall in inflation in recent months which saw inflation decelerating to 12. 3 percent in May 2017.

Kabambe said at its second monetary policy meeting on Tuesday and yesterday, the committee also agreed to maintain the Liquidity Reserve Requirement (LRR) at 7.5 percent.

“Before arriving at this decision, the Committee considered latest developments in the global and domestic economies. Global economic growth is expected to strengthen marginally to 3.5 percent in 2017, from 3.1 percent in 2016. The pick-up in global activity is driven by developments in emerging and developing economies.

“On the domestic front, real GDP growth is projected to rebound to 4.5 percent in 2017, from 2.7 percent in 2016, on the backing of favourable weather conditions and stable macroeconomic environment,” reads the statement in part.

Kabambe said the committee, however, recognised that continued economic recovery over the medium to long-term horizon depends on sustained macroeconomic stability and addressing underlying structural constraints, especially on the supply side.

The MPC observed that inflation has continued to decline for the tenth consecutive month. Headline inflation fell to 12.3 percent in May 2017, from 23.5 percent in July 2016. Food inflation dropped to 11.2 percent in May 2017, from 29.2 percent in July 2016, on account of improved supply of food stocks. Non-food inflation decelerated to 13.5 percent in May 2017, from 18.7 percent in July 2016, reflecting lagged effects of tight monetary policy.

“The outlook for inflation has improved significantly since the last MPC meeting, especially because the May data confirm that disinflationary momentum has strengthened. Growth in money supply rose to 18 percent year-on-year in May 2017, from 15 percent in December 2016, but was below 26.3 percent recorded in May 2016.

The underlying pace of monetary expansion was in line with seasonal patterns and was consistent with the level of economic activity for the year. Net credit to government from the banking sector expanded to K104.8 billion in May 2017, from K86.0 billion recorded in January 2017.

Malawi Confederation of Chambers of Commerce and Industry Chief Executive Officer, Chancellor Kaferapanjira, welcomed the downward revision of the policy rate by the central bank.

Kaferapanjira, however, pleaded with commercial banks to cut their base lending rates propotionate to the reduction in policy rate.

Indeginous Businesses Association of Malawi President, Mike Mlombwa, said the significant slash in the policy rate should give commercial banks enough room to induce a significant cut in their base lending rates.

“We hope that commercial banks will act in good faith by reducing their borrowing rates by a bigger margin than they have done in the past,” Mlombwa said.

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