Interbank borrowing rates—the rate at which commercial banks lend to each other to meet liquidity requirements—dropped by about 12 percent last week, signalling improved market liquidity.
Data provided by Nico Asset Managers Limited indicate that the average interbank borrowing rate for the week ending January 17 decreased to 21.8 percent from 24.8 percent in the previous week.
The investment management firm in its weekly market update further indicates that liquidity levels increased during the week and averaged K21.7 billion a day from a daily average of K20 billion in the previous week.
The firm further indicates that borrowing between banks averaged K1.40 billion last week, decreasing from K2.47 billion per day in the previous week.
The Reserve Bank of Malawi (RBM) has been implementing a tight monetary policy to control money supply and consequently rein in inflation.
Last week the RBM engaged in open market operations (OMO) raising a total of K14.4 billion through the OMO Repo auctions held during the week with rates ranging from 23 percent to 27 percent.
Nico Asset Managers, however, indicates that there was a total of K6.1 billion of government debt maturing during the week and, therefore, the OMO Repos yielded a net withdrawal of K7.2 billion from the market.
But experts have, so far, argued that the central bank is using a wrong policy to control inflation by targeting money supply, arguing that Malawi’s consumer price index is mainly determined by the food basket. In November 2013, inflation rose to 22.9 percent.
Chancellor College economics professor Ben Kaluwa earlier explained that the increase in market liquidity is a sign that people cannot afford to borrow from commercial banks due to high lending rates.
But regardless of the improvement in liquidity, most commercial banks have been raising their base lending rates to above 40 percent in the wake of the Lombard rate and changes that were made to the Liquidity Reserve Requirement (LRR) since early this year.
The Lombard rate, according to the sixth Monetary Policy Committee (MPC) meeting, was pegged at 27 percent while the vault cash would not be used in LRR computation.
Although the Lombard rate was pegged at two percentage points above the bank rate, the MPC meeting held in December resolved that it was important to manage money market operations with a view to keeping money market rates around the bank rate currently pegged at 25 percent.