Economists hail bank rate cut

Economists have hailed the policy rate cut by the Reserve Bank of Malawi (RBM) from 24 percent to 22 percent, saying it is good for the investing public.

On Friday, RBM revised downwards the policy rate—the rate at which commercial banks borrow from the central bank as a lender of last resort—following the Monetary Policy Committee (MPC) meeting which was held to review recent global and domestic economic developments.

Minutes of the MPC meeting chaired by RBM Governor Charles Chuka indicate that the committee resolved to cut the policy rate, or bank rate, after taking into account the disinflation process in the recent past and inflation outlook.

Said the statement: “The MPC observed that inflation has been declining since August 2016 with headline inflation falling to 16.1 percent in February 2017 from 37.9 percent in February 2013 and compared to 23.4 percent in February 2016.”

The bank said the sustained deceleration in non-food inflation from 42.8 percent in March 2013 to 14.6 percent in February 2017 reflected a consistent tight monetary policy stance.

In light of the sharp drop in inflation, the central bank has also adjusted inflation projection downwards from 16.1 percent to 14.2 percent by June 2017.

Catholic University head of economics department Gilbert Kachamba, in an interview yesterday, described the rate cut as good for the investing public.

He said: “This is a good development as it will encourage investment and ultimately trigger economic growth as long as the banking rate responds to this change.”

Economic statistician Alick Nyasulu said it is not surprising that the central bank has revised the policy rate downwards as it is normal that rates tend to be cut once inflation goes down.

He said while it is a positive development in the general framework of things, the cost of finance is just one reason our economy is failing to grow.

“Our issues are more to do with energy and water. Even if you borrow at five percent while you only have few hours of electricity and spend a lot of fuel for generators, the gains from reduced interest rates do not mean much.  Our issues are more structural and infrastructure related than monetary policy,” he said.

Commenting on the 14.2 percent inflation projection by June, Nyasulu said the target is achievable in the light that this is still a lean season and food prices are declining.

He observed that maize prices have been declining for a while; hence, it is possible that the country can achieve the target.

Economist Cosmas Chigwe said the reduction of the policy rate was expected looking at the rate inflation has been falling.

He said the development is good for the economy, adding that high inflation and high interest rates are hampering economic growth.

“Economic fundamentals are pointing in the right direction. The kwacha has been stable for some time and rains have been good,” he said.

The policy rate  was last revised downwards in November 2016.