Head of economics at Catholic University Gilbert Kachamba has predicted a further fall in the policy rate, from the current 22 percent, on account of falling inflation and reduced demand for money.
The annual rate of inflation has been falling steadily for more than 10 months since June 2016.
Helped by declining food prices, a relatively stable kwacha, and lower international fuel prices, and more significantly, by fiscal adjustments that have characterised fiscal management since June 2014, overall inflation has declined without interruption by 9.7 percentage points from 24.3 percent in July 2016 to 14.6 percent in April 2017.
This downward trajectory of both food and nonfood inflation, according to Finance Minister Goodall Gondwe has provided scope for monetary policy to start unwinding.
In response to these developments, the Reserve Bank of Malawi (RBM) reduced its policy rate to 22 percent in March 2017 from 27 percent at its peak.
“With a continuation of this trend in inflation, it is expected that the Reserve Bank of Malawi will reduce the policy rate further and generate a continued fall of rates of interest,” Gondwe told Parliament on May 5.
Echoing Gondwe’s sentiments, Kachamba on Wednesday said with the improvements in the macroeconomic environment and the recent trends in inflation, chances are indeed high that the policy rate may go down further.
“The policy rate is highly determined by the demand and supply of money by the commercial banks and now with the coming of mobile money, the demand for money by the commercial banks has shrunk a little bit and with inflation going downwards we expect the policy rate to respond to these developments and go down as well,” he said.
Kachamba also said the cost of borrowing is also going down as commercial banks are charging round 32 percent in interest rates, thereby limiting access to finance.
RBM spokesperson Mbane Ngwira said the decision to change the policy rate is made by MPC the committee which looks at economic developments, including inflation, and expectations to arrive at its decision.
In its fifth MPC meeting statement, the central bank said rapidly declining inflation creates room for further gradual easing of monetary policy.
Both the International Monetary Fund and World Bank anticipates Malawi’s headline inflation to continue to decline in 2017 on account of a better harvest and stability of both the exchange rate and international oil prices.
Inflation is currently projected to reach 10.7 percent in June 2017 and 8.5 percent in December 2017.
In the second half of 2016, inflation came down much more rapidly than anticipated. The decline continued into the first and second quarters of 2017 as headline inflation reaching 12.3 percent in May 2017.
Although the recent reduction in the benchmark rate was hoped to stimulate private sector borrowing to some degree, the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) argue the rate still remains high for businesses that would want to borrow for long-term investment projects.
MCCCI chief executive officer Chancellor Kaferapanjira was recently quoted as saying current high lending rates are stiffing private sector growth.
Econmic commentators say the lending rates, currently hovering at around 32 percent, are not healthy for a developing economy as they tend to discourage people from borrowing and saving, let alone acquire shares on the stock market.
They argue that high cost of borrowing is not only affecting the business community, but all Malawians in general as loans and mortgage consumers have to endure high interest rates.
Malawi remains among the highest in the world, which also prohibits investors from, borrowing for business expansion purposes.
According to a 2014 FinScope Consumer Survey Malawi report titled access to finance in Malawi, interest rates on commercial loans in Malawi are far higher than in other countries in the Southern African Development Community (Sadc) region with figures showing that estimates range from 20 to 40 percent , with some producers quoting as high as 55 percent. n