Bank loans get cheaper

• Central bank cuts bank rate to 14.5%

In a bold move some market analysts said was expected, the Reserve Bank of Malawi (RBM) yesterday slashed the policy rate—a key driver of interest rates on loans—by 9.3 percent.

RBM also cut by 33 percent the Liquidity Reserve Ratio (LRR)—a fraction of bank deposits that commercial banks are required to keep at the central bank.

The decisions RBM Governor Dalitso Kabambe announced at a news conference in Blantyre pushed the policy rate from 16 percent to 14.5 percent and eased the LRR from 7.5 percent to five percent.

While helping to make more credit available and cheaper to firms and households, both measures reflect a loose monetary policy stance that, however, is fraught with risks, especially in an election year when spending will likely skyrocket.

Practically, the decisions also mean injecting money supply in the economy that the central bank may be forced to mop up in the not-so distant future.

Secondly, while inflation has eased back into the single digit bracket, the crop outlook is murky as the first round of crop estimates are not yet out.

While fears of non-food inflation may have eased following a drop in fuel prices last month, rising demand for wage hikes, climbing electricity and water tariffs plus government expenditure could push up a general rise in prices and money supply.

In the meantime, some key government institutions such as the Malawi Defence Force, the Police and State House have already blown most of their budgets mid-way through the current fiscal year.

But to the business community and households, the decision by the RBM’s Monetary Policy Committee (MPC) should be music to their ears as lower interest rates will mean savings in financing charges for both existing and future credit lines.

In his announcement, Kabambe said the committee’s assessment is that the stance of monetary policy remains adequately tight and that monetary policy actions would continue to gradually anchor inflation expectations towards the medium-term inflation objective of five percent. He said the measures would not jeopardise government’s economic growth agenda.

“In setting the monetary policy stance, emphasis is placed on closing the gaps between the RBM’s projected inflation and the target.

“While greater emphasis in this framework is on pre-empting risks to macroeconomic outlook, a careful balance is applied to ensure that historical as well as current developments also feed into the policy process,” he said.

Kabambe said the approach of the MPC is to look through the first-round effects and focus on the possible second-round effects of supply side shocks.

Reacting to the move, Malawi Confederation of Chambers of Commerce and Industry (MCCCI) chief executive officer Chancellor Kaferapanjira said the private sector is hopeful that the cuts would be passed on to borrowers and that in the medium-term translate into increased lending to the real sector for productive purposes for the benefit of all economic participants in the economy, consumers and producers.

He said: “Previously, we observed that when the policy rate was at 16 percent and Lombard rate was at 24 percent, commercial banks were mistakenly but knowingly taking 18 percent as a base before loading any commercial risk premiums to commercial lending rates, even when they were not using borrowed funds from the Reserve Bank, in which case they would be justified to add the extra two percent.

“We, thus, expect commercial banks to respond immediately to these measures in order to benefit the real sector”

Economics Association of Malawi (Ecama) president Chikumbutso Kalilombe agreed with Kaferapanjira, saying the move would likely spur economic growth from investments in real sector as it allows entrepreneurs and investors to venture into business with minimal macroeconomic risk considerations.

He said: “As a country, we have been looking forward to such and hope it can be sustained. We hope this move will stimulate the country’s productivity as the downside to it can be a situation where we end up encouraging consumption and imports that would not help the economy.”

In his reaction, Alliance Capital Limited research manager Bond Mtembekeza said the move was expected as it was obvious that RBM would reduce the policy rate as both fundamentals and outlook have improved.

The governing Democratic Progressive Party may also brag that the drop in interest rates is a reflection of an economy well managed by the Peter Mutharika administration with positive spin-offs on key macroeconomic variables such as interest rates and exchange rate which have stabilised for years. n