Malawi’s bank rate cut to 24%, draws mixed reaction

The reduction of the policy rate by the Reserve Bank of Malawi (RBM) by three percentage points to 24 percent from 27 percent has drawn mixed reaction from stakeholders.

Briefing journalists in Blantyre yesterday on the 4th Monetary Policy Committee (MPC) meeting of the year, RBM Governor Charles Chuka said the central bank reduced the bank rate because of slowing down of inflation rates, stable kwacha and fiscal discipline.

He said: “Consistent implementation of a tight monetary policy stance, and actions taken by government to reduce fiscal pressures, including from Fisp [Farm Input Subsidy Programme] operations and from Admarc’s [Agricultural Development and Marketing Corporation] maize operations, have combined to reduce inflationary expectations.

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“Consequently, the kwacha exchange rate has been stable, and despite the drop in exports, the country’s official foreign exchange reserves remain at about three months of imports.

“Looking ahead, the factor that is unknown is whether or not the exchange rate would behave better than last year and much depends on fiscal operations. On balance, the exchange rate outlook is far much better than last year, implying a much less inflationary impact from the exchange rate. While utility rates might go up, the increase might be relatively less. Thus, year on year, inflation will generally continue to slow down.”

Reacting to the development, Secretary to the Treasury Ronald Mangani, who co-addressed the news conference with Chuka, has since described the reduction in the policy rate as the beginning of a turnaround in the economy ,saying the move would help open more economic opportunities for businesses and Malawians as a whole.

He said: “This reduction in the policy rate reflects the fact that inflation rate is on the downward truck and this means that the economy has started turning round in the right direction.

“We are hoping that production will respond to this move by RBM and we are hoping to see more goods being produced, more jobs will be created and a trend that reflects a reversal in the economic instability challenge that we have been facing over a long period of time may be witnessed.”

But Economics Association of Malawi (Ecama) execuitive director Edward Chilima, while commending the central bank for the reduced bank rate, said in an interview that there is more that needs to be done if the economy is to turn around.

He, however, urged commercial banks in the country to respond swiftly by reducing their interest rates on time.

Said Chilima: “This is very commendable and a good response to the economy. This is what the economy has been expecting. Actually, it could have been lower than that, but since this is in line with inflation; it is the best they could have done. Even at 24 percent, it is still not good because the interest rates will still be high at somewhere around 35 percent.

“Our request to banks is that they should immediately respond because normally they take time to respond or they may reduce their rates lower than the reduction in the bank rate. This needs some patriotism.”

Headline inflation has slowed down to 20.1 percent in October 2016 compared to 24.7 percent recorded in October last year.

Chuka said that inflation is projected at 22.2 percent in December 2016, but to edge up slightly to 22.7 percent in February 2017 before decelerating to 18.6 percent in June 2017.

“Thus, at 27 percent the policy rate is four percentage points above the estimated February peak of 23 percent. In view of this scenario, but with a need to remain cautious, MPC decided to reduce the policy rate by three percentage points to 24 percent, maintain the Liquidity Reserve Requirement [LRR] ratio at 7.5 percent and to review the position at the next MPC meeting in March 2017,” he said.

The rate was last revised in November 2015 from 25 percent to 27 percent.

High interest rates, now around 43 percent, have been one of the country’s barriers to doing business, according to the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) Business Climate Survey Report 2015.

Weighing in on the reduction, Small And Medium Enterprises Development Institute public relations officer Mian Mpesi commended RBM for the move which he said will help ease doing business for the SMEs. n