Mixed reactions on policy rate stance
The Monetary Policy Committee of the Reserve Bank of Malawi meeting in Lilongwe on Wednesday decided to maintain the policy rate— the rate at which commercial banks borrow from the central bank as lender of last resort— at 14 percent, a stance that has attracted mixed views from economists. Reacting in an interview Thursday, economist Millward Tobias said…
The Monetary Policy Committee (MPC) of the Reserve Bank of Malawi (RBM) meeting in Lilongwe on Wednesday decided to maintain the policy rate—the rate at which commercial banks borrow from the central bank as lender of last resort—at 14 percent, a stance that has attracted mixed views from economists.
The MPC also maintained the Liquidity Reserve Requirement ratio on domestic and foreign currency denominated deposits at 3.75 percent and the Lombard Rate at 20 basis points above the policy rate.
This is despite inflation sprouting to 23.5 percent in June 2022.
The MPC says the decision has been necessitated by the need to allow more time for the impact of the April 2022 policy rate increase to transmit through the economy.
It notes that it will closely monitor inflation developments in the next few months, and stands ready to adjust the policy rate upwards should inflationary pressures persist.
Reacting in an interview Thursday, economist Millward Tobias said having the policy rate below headline inflation is an anomaly, which could hurt the economy further.
“It is a norm that interest rates should be above inflation rate and if the vice versa happens, it means businesses such as banks will be making losses because real interest rate is the rate minus inflation and the result must be positive,” he said.
But local economic think-thank, the Economics Association of Malawi (Ecama) has since backed the MPC’s position, saying the reasoning is justifiable.
Ecama Executive Director Frank Chikuta said impact of fiscal policy options such as the 25 percent Kwacha devaluation were yet to be fully felt by some sections of the economy, hence, the need to minimise its gravity.
He added that deciding on the policy rate stand is not just a factor of inflation rate but many other factors including the output gap.
“If the output gap is still negative, then there is still room to maintain an accommodative monetary policy so that it can help to make sure that production increases,” he said.
In a separate interview, Financial Market Dealers Association of Malawi Vice President Jim Kalua said already, there is an outcry over elevated cost of living, and that some misalignments in the economic framework were being perfected which remains painful processes to majority Malawians.
He said the decision would encourage investments because higher interest rates deter investments and raising policy rate which may result in interest rate increase would mean that investors have to cough more to access working capital and the other requirements.
“Higher borrowing rates could postpone investments and it leads to higher loan defaults. With recent devaluation, the country is already experiencing high cost of living.
“However let us also appreciate that RBM aligned exchange rate to the reality on the ground but some quarters still feel it has not reached its equilibrium,” he said.
A raise in policy rate is traditionally aimed at controlling flow of liquidity and arresting inflation, which normally results in elevated cost of borrowing.
In April this year, RBM raised the policy rate from 12 percent.
ANA NEWS WIRE Disclaimer:
The African News Agency (ANA) is a news wire service and therefore subscribes to the highest standards of journalism as it relates to accuracy, fairness and impartiality.
ANA strives to provide accurate, well sourced and reliable information across Text, Images and Video. Where errors do appear, ANA will seek to correct these timeously and transparently.
The ANA platform also contains news and information from third party sources. ANA has sought to procure reliable content from trusted news sources but cannot be held responsible for the accuracy and opinions provided by such sources on the ANA platform or linked sites.
The content provided for on the ANA News Wire platform, both through the ANA news operation and via its third party sources, are for the sole use of authorised subscribers and partners. Unauthorised access to and usage of ANA content will be subject to legal steps. ANA reserves its rights in this regard.
ANA makes every effort to ensure that the website is up and running smoothly at all times, however ANA does not take responsibility for, and will not be held liable for times when the website is temporarily unavailable due to technical issues that are beyond our control.