The Monetary Policy Rate is expected to be maintained at 18 percent in the short term as pressure on the exchange rate gradually increases during the lean and growing seasons due to increased demand for foreign exchange (forex).
Investment and advisory firm Nico Asset Managers have said this in their October economic report.
In the third Monetary Policy Committee (MPC) meeting for 2017, the Reserve Bank of Malawi (RBM) maintained the benchmark rate at 18 percent and the Liquidity Reserve Requirement (LRR) at 7.5 percent after considering the latest developments in the economy and the need to keep inflation firmly on a downward path and to remain in single digit.
Inflation rate, recorded at 8.4 percent in September 2017, is at its lowest in five years, the exchange rate has remained stable for close to a year, the economy has recorded the sharpest drop in food prices in the past five years and that the current gap between the policy rate and the inflation rate is the widest in the last five years.
However according to the firm, if inflationary pressures continue to subside and the country has good rainfall, leading to a good maize harvest, the Policy Rate may fall in the medium term.
“Interest rates on the inter-bank market are dependent on the volatility of liquidity and are unlikely to be stable. Treasury bill yields are expected to remain below the Policy Rate level.
“Commercial bank base lending rates are currently at an average of 27 percent from an average of 34 percent in 2016, and no change is expected for the remainder of this year. In 2018, however, the base lending rates may decline if the policy rate will be reduced” reads the report in part.
RBM says the current policy stance will help to consolidate the gains achieved so far in reducing inflation rate to ensure that it remains in single digit for a longer period to guarantee sustainably low interest rates, thereby enhancing private sector investment and economic growth over a long term horizon
Lower lending rates reduce the cost of borrowing which may help boost private sector activity, resulting in improved economic growth. It may also lead to higher property values as demand is increased by reduced mortgage rates.
The continued fall of interest rates will also lead inter alia to a significant reduction in the interest payment bill of future national budgets.