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Reserve Bank of Malawi upholds policy rate

Wilson Banda

John Kapito

For the fifth time in a roll, the Reserve Bank of Malawi (RBM) Thursday announced to have maintained the policy rate—the rate at which commercial banks borrow from the central bank as lender of last resort—at 12.0 percent.

The policy rate remains a key driver of interest rates and RBM’s position will, to an extent, bring further stability to the credit market, an ideal situation for sparring economic activity in the country.

But some commentators feel the stance does not correspond with other macroeconomic fundamentals such as inflation and will backfire in due course.

In a statement issued Thursday at the end of a two-day Monetary Policy Committee (MPC) meeting—first of its kind in 2022—RBM Governor Wilson Banda said the option remains ideal to propel productivity, albeit mounting inflation pressure which is still posing a great threat.

“Although inflation pressures are mounting, the sources were considered transitory and likely to dissipate after the lean period. At the same time, there is a need for policy support to entrench the recovery of the domestic economy from the Covid-induced slowdown,” Banda says in the statement.

The central bank governor also announces that the MPC resolved to maintain the Liquidity Reserve Ratio on domestic and foreign currency dominated deposits at 3.75 percent and the Lombard rate at 20 basis points above the policy rate.

Economic think-tank, the Economics Association of Malawi (Ecam), feels the move is deliberately aimed at containing pressure facing the economy.

Ecama Executive Director Frank Chikuta said considering the reasons given for the stance, it makes economic sense for RBM to maintain or even cut the rate to instil confidence in the industry and spur activity in the economy.

Reacting in an interview yesterday, Consumers Association of Malawi Executive Director John Kapito said Malawians were yet to feel the impact of similar decisions made before, saying they do not reflect the situation on the ground.

He said such decisions are a result of panic and fear of possible public outcry if authorities were to act otherwise, a situation that would have economic repercussions in the long run.

“What this means is that the banks might have money, but no one will be borrowing because there is less or no activity on the market; or, if the industry players borrow from the commercial banks at the stable rate, they may produce but no one will be able to buy as the cost of living remains elevated,” Kapito said.

He suggested an upward adjustment of the policy rate to reflect market trends and auger will with fundamentals such as inflation.

Meanwhile, RBM sees pressures on inflation continue to mount in the foreseeable future; mainly arising from a seasonal increase in prices of domestically produced food items, and imported inflation.

The central bank projects the annual average headline inflation for 2022 at 10.4 percent, from an earlier forecast of 8.9 percent.

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