Borrowers should brace for hard times ahead following the decision by the Monetary Policy Committee (MPC) of the Reserve Bank of Malawi (RBM) to hike the policy rate by two percentage points from 12 to 14 percent in a desperate attempt to tame runaway inflation.
Simply put, the policy rate is the interest rate used by the central bank as an instrument of monetary policy. It is usually the rate at which the financial markets regulator is willing to lend money to commercial banks.
Traditionally, the hike in the policy rate drives up the cost of borrowing money from commercial banks.
Analysts told The Daily Times Wednesday that a hike in policy rate was expected following a sharp rise in inflation in recent months.
In a statement released Wednesday, the MPC says it noted that inflation pressures continued to mount following the persistence of Covid pandemic-induced supply-demand imbalances, supply-chain disruptions and rising global energy and food prices, which have been compounded by Russia’s invasion of Ukraine.
The statement, which MPC Chairperson and RBM Governor Wilson Banda has signed, says the committee observed that the prominence of fuel and other war-affected commodities in the domestic consumption basket could lead to broader and more persistent price pressures.
“In order to contain the impact of these pressures on inflation expectations, the committee decided to raise the policy rate by 200 basis points to 14.0 percent while maintaining the rest of the policy parameters at their previous levels,” the statement reads.
Inflation has been on an upward spiral in recent months and was seen at 14.1 percent in March 2022.
Malawi University of Business and Applied Studies economist Betchani Tchereni said the “hike in the policy rate has been softer than anticipated”, considering that inflation is already at 14.1 percent.
Centre for Research and Consultancy Director Milward Tobias said the hike in the policy rate addresses the economic anomaly that occurred when the inflation rate was higher than the policy rate.
“To borrowers, it depends on how commercial banks will respond. If they raise the lending rate also, then it means high cost of credit,” Tobias said.
Economics Association of Malawi Executive Director Frank Chikuta said the policy rate hike represents a policy shift in monetary policy from an accommodative stance to a tight monetary policy.
In line with the Socio- Economic Recovery Plan, the authorities embraced a more accommodative policy stance as one way of jump-starting growth, which was heavily hurt in the wake of the Covid pandemic.
Chikuta said the shift was necessary to contain growing inflation, which had threatened to wreak havoc on the economy.
According to Chikuta, it is expected that commercial banks will adjust their base lending rates in line with the elevated policy rate.
The hike in policy rate brings to an end 17 months of a low-interest regime, which ran from November 2020 when the policy rate was last adjusted.
According to MPC, the inflation pressures are expected to persist, mainly due to the spill-over effects of the ongoing war in Ukraine, sanctions imposed on Russia, as well as the impact of the unfavourable weather conditions during the 2021-22 agricultural season.
“The committee decided to maintain the Lombard rate at 0.2 percentage points above the policy rate, and the Liquidity Reserve Requirement (LRR) ratio on both local currency and foreign currency denominated deposits at 3.75 percent.
“The MPC is of the view that this policy direction is appropriate in taming the rising inflation and ensuring that inflation expectations are well anchored,” Banda said.