‘RBM likely to hike bank rate again’
The Reserve Bank of Malawi (RBM) could be forced to effect another bank rate hike should the country’s year-on-year headline inflation continue rising, Nico Asset Managers Limited has said.
“The RBM has raised the benchmark interest rate from 13 percent to 25 percent and further increases could be introduced should it fail to head off inflation,” says the investment management advisory firm, in its latest monthly economic report for January 2013.
The central bank revised the bank rate—the rate at which commercial banks borrow money from the central bank—thrice in a space of six months last year to stabilise the kwacha and anchor inflation expectations.
In 2012, the annual average national inflation rate stood at 21.3 percent, 13.7 percentage points higher than recorded in 2011.
On one hand, year-on-year headline inflation for December 2012 was pegged at 34.6 percent which is one of the highest in southern Africa.
While in recent times the central bank has intensified the implementation of monetary policy, inflation rate continues to skyrocket as prices of food, which contribute about 58.1 percent to national inflation, continue to soar.
The firm says monetary policy is expected to be tight over the first half of the year as government tries to foster price stability and support the kwacha’s value.
“Despite this, the RBM will also seek to provide room for growth in credit to the private sector in order to promote economic expansion. Supply-side factors will continue to be the main drivers of inflation and despite the tight monetary policy stance, inflation will remain in double-digit territory over the first half of the forecast period,” says the firm.
But the Blantyre-based firm has warned that high interest rates are likely to result in reduced private sector investment and economic growth projected at 5.5 percent in 2013 from a low 1.9 percent.
It also says high borrowing costs may also result in increased risk of defaults of existing liabilities and foreclosures of property pledged as security.
“This may dampen the performance of the property market. Increase in rates on the money market may result in investor shift from stock market to money market as rates become attractive,” it adds.
Last month, RBM announced that it has resolved to maintain the bank rate at 25 percent barely a month after the central bank hiked the rate from 21 percent in December.
RBM spokesperson Ralph Tseka in an interview justified the steady bank rate, saying inflationary pressure has marginally eased and that statistics are pointing that money supply growth is decreasing.
Finance Minister Dr. Ken Lipenga said last Friday when he presented the Mid-Term Budget statement in Lilongwe that although inflation is currently high, the projections are showing a downward trend buoyed by significant fiscal consolidation and a tight monetary policy stance.
The minister said the subsequent increases in interest rates were a necessary complementary policy reform aimed at mitigating pressure on the kwacha exchange rate.
