Interbank rates drop 13.5 percent
Interbank rates have dropped by 13.5 percent from 42.3 percent in mid-April at peak to 28.8 percent in the week ending June 28, a sign that banks are no longer desperate to meet liquidity requirements.
Interbank lending occurs when banks extend loans to one another to meet liquidity requirements to manage any potential bank runs by clients.
The decline in the interbank rates indicates that commercial banks are no longer desperate to borrow from other banks and are thus not threatened to breach the Reserve Bank of Malawi (RBM) liquidity requirements.
The improvement in liquidity is also good news in that it may lead to a decline in commercial bank interest rates as evidenced by Standard Bank—that reduced its base lending rate by two percentage points to 38 percent.
Commenting on the decline in the interbank rate, a local money market analyst Chikavu Nyirenda in an interview on Tuesday, said interbank rates often shift but hinted that the general decline is an indication in the improvement of liquidity.
“The interbank rates shift more often depending on banks’ closing and opening cash balances while commercial interest rates are based on long-term factors. The general decline in the interbank rates means that commercial banks are no longer desperate to borrow from others to bridge liquidity requirements and avoid penalties by RBM.
“Commercial rates are usually determined by competitive pressures to attract deposits or to discourage or encourage borrowing. There is a loose correlation between interbank rates and commercial bank rates,” said Nyirenda.
He added that inflation has an indirect impact on commercial interest rates since RBM base lending rate is based on inflation rate.
An investment analyst commenting on interbank lending rates agreed with Nyirenda in the improvement of liquidity. The investment analyst, however, said interest rates may also be influenced by big customers who may negotiate better rates for their deposits.
RBM in the April Economic Review said money supply rose by K25.4billion (about $63.5m) to K422.7 billion (about $1bn) in the month, an indication that liquidity has improved.
The central bank explained that the rise in currency in circulation was due to the seasonal transactional demand for money upon realisation of proceeds from agricultural produce sales, whereas the increase in demand deposits was a result of realignment of maturing fixed deposits from the term deposits category.
Maintaining a tight monetary policy, RBM has since December 2012 upheld the base lending rate at 25 percent. RBM has also maintained the Liquidity Reserve Requirement—money that commercial banks deposit with the central bank—at 15.5percent.
Inflation rate as measured by the Consumer Price Index (CPI), slowed down to 31 percent in May 2013.
