The falling inflation rate, kwacha gain and improvement in foreign exchange reserves could prompt the Reserve Bank of Malawi (RBM) to cut the policy rate, or bank rate to below 20 percent, the central bank has said.
The fall in the bank rate—the rate at which commercial banks borrow from the central bank as a lender of last resort currently at 25 percent—could compel commercial banks to also cut lending rates to around 30 percent from around 39 percent, analysts say.
RBM raised the policy rate to 25 percent from 22.5 percent in October last year, a situation that contributed to an increase in prime lending rates to above 35 percent.
Inflation rate has fallen three percentage points to 21.5 percent in January while RBM expects the rate to fall to 15 percent by June this year due to both cost push and supply factors.
RBM spokesperson, Mbane Ngwira, in an interview yesterday said the inflation outlook effectively reflects expectations in the policy rate.
“The policy rate will be reduced based on inflation. Usually in Malawi’s case, the policy rate is above inflation, so if we expect inflation to fall to 15 percent by June, the policy rate should also fall with about the same margin to possibly below 20 percent,” he said.
Concurring with Ngwira, an analyst in one of the local commercial banks said yesterday that if inflation rate continues falling and meets the expected targets then interest rates should fall along with prime rates, hitting around 30 percent by June this year.
“If government and RBM implement prudent policies, then we should see a sharp fall in interest rates. We have noticed that inflation has started to fall and is expected to decline further.
“Liquidity has also improved while the kwacha has been appreciating and is expected to appreciate further. Depending on whether the RBM cuts the policy rate, which is now at 25 percent, we should see lending rates falling to around 30 percent,” said a treasury manager who sought anonymity.
The analyst, however, said for this to pass, the central bank should implement prudent policies and ensure that treasury bills (T-bills) rates fall.
After raising the bank rate, a precursor to the policy rate, to 25 percent in December 2012, the rate was reduced to 22.5 percent in July based on an analysis of economic developments, including domestic growth, inflation, fiscal developments, foreign exchange reserves and financial stability.
Along with the policy rate cut, RBM’s Lombard facility—an automatic window for liquidity stressed banks— was also reduced from 27 percent to 24.5 percent.
The reduction in the rate prompted commercial banks to cut their lending rates with prime rates falling to about 35 percent.