Inter-bank lending rates—the rate at which banks lend to each other—fell to 14 percent by Thursday last week, indicating a marked improvement in commercial bank’s liquidity levels.
Reserve Bank of Malawi (RBM) data show that the inter-bank lending rate for overnight borrowing dropped to 14 percent on February 20 from an average 21.6 percent in the week ending February 7.
A weekly market update from Nico Asset Managers Limited for week ending February 21 noted that liquidity levels increased during the week averaging K19.20 billion a day from a daily average of K17.83 billion the week before.
The investment advisory firm said borrowing between banks averaged K744 million per day in the week ending February 21 2014, decreasing from K1.02 billion per day in the previous week while the average inter-bank borrowing rate for the week decreased to 17.23 percent from 20.46 percent the prior week.
The RBM has been implementing a tight monetary policy to effectively control money supply and rein in inflation.
University of Malawi’s Chancellor College economics professor Ben Kaluwa attributed the increase in market liquidity to the high interest rates, arguing that most people cannot afford to borrow from commercial banks at the current lending rates.
But regardless of the improvement in liquidity, most commercial banks early January increased their lending interest rates to above 40 percent in the wake of the Lombard rate and changes that were made to the Liquidity Reserve Requirement (LRR).
According to the sixth Monetary Policy Committee (MPC) meeting of December 10 2013, the Lombard rate was pegged at 27 percent while the vault cash would not be used in LRR computation.
Two of the country’s biggest commercial banks, Standard Bank and National Bank of Malawi (NBM), last week announced a reduction in interest rates to 35 percent and 36 percent respectively, citing the trending down of Treasury bills (T-Bills) rates and liquidity improvement.
Although the Lombard rate was pegged at two percentage points above the bank rate at 25 percent, the MPC meeting resolved that it was important to manage money market operations with a view to keeping money market rates around the bank rate.
In the recent MPC meeting held a fortnight ago, members noted that the decline in T-Bills yields was as a result of improved liquidity conditions, but further pointed out that intensified fiscal discipline was necessary to keep T-Bills yields down, thereby strengthening the effectiveness of the policy rate.