The revision of policy rate or bank rate by the Reserve Bank of Malawi (RBM)—as expected by the market—is tricky and will depend on several market dynamics between now and the end of the second quarter in July, 2014, the central bank’s spokesperson Mbane Ngwira has said.
Ngwira, speaking in an interview with Business Review on Tuesday, said loosening interest rates could potentially trigger high borrowing from commercial banks which he said could induce a huge appetite for foreign exchange.
In turn, the RBM spokesperson said that could exert pressure on foreign exchange market and increase the price of a unit of foreign currency hence weakening the local unit to the chagrin of importers and those Malawians in the country with an obligation of paying tuition fees in foreign currency as they cough more kwachas to buy a unit of foreign currency.
Bank rate is the rate at which commercial banks borrow money from the central bank and the rate has been static for almost two years at 25 percent now.
It is a monetary policy tool used to stabilise the currency movement and contain high inflation rates, among other macroeconomic indicators.
“It [the review of policy rate] will depend on the outcome of whatever happens between now and the time the [Monetary Policy] Committee meets again at the end of the second quarter in July but we know expectations from the market were that the rate will be revised downwards,” said Ngwira.
RBM last adjusted bank rate on December 3 2012 by 19 percent from 21 percent to 25 percent.
But he was quick to state that the central bank will look into several other factors and their associated risks such as elections before reviewing the policy rate.
He said the bank will continue monitoring the foreign exchange market conduct between now and June ‘then we should have bought enough forex.’
Ngwira said if a currency is appreciating, imports become cheap and loosening interest rate could induce more lending from banks for foreign exchange purchase by businesses which he said could increase the price of the kwacha to other major currencies.
“We want the exchange rate price to be at optimal level,” he added.
According to the RBM latest MPC minutes, the review of policy rate will enable the bank balance the impact of ongoing foreign exchange operations on liquidity and the anticipated fiscal risks due to election-related expenditure in government.
The kwacha continues to show signs of resilience to other major currencies, appreciating to around K380 to the US dollar from a peak of K475 in some foreign exchange bureaus last year.
Although tobacco dollars, which started trickling in beginning March 24, 2014, have helped soften the movement of the kwacha in recent times, economic analysts also contend that shrinking demand for dollar should also explain the recent appreciation of the currency.
And despite donors-whose budget support is also one key source of foreign exchange-withholding budget support since November 7 last year, the kwacha still showed sign of stability and subsequently started appreciating, defying the market expectations.