Reserve Bank of Malawi (RBM) through the Monetary Policy Committee (MPC) on Wednesday raised the policy rate, or bank rate, by two percentage points to 27 percent from 25 percent.
Reads the statement of the 4th MPC for 2015 published on Thursday, RBM said the bank rate—the rate at which commercial banks borrow from the central bank as the lender of last resort—has been raised in view of “persistently high inflation, depreciating exchange rate, as well as uncertainties on food prices and wage demands”.
The MPC meeting chaired by Governor Charles Chuka met on Wednesday to decide on the rate, which has a domino effect on commercial bank interest rates currently hovering around 36 percent.
Said the statement: “Inflationary pressures continued in September 2015 as headline inflation reached 24.1 percent from 23 percent in the previous month. The pressures rose mainly from non-food inflation, which picked up by 1.4 percentage points, reflecting continued depreciation of the kwacha and second round effects from increases in food prices.
“Food inflation also increased, albeit marginally by 0.5 percentage points due to the after-effects of the decline in agricultural production for the 2014/15 season.”
The rate was last revised upwards in October 2014 from 22.5 percent owing to inflation pressures.
Weighing on the upward adjustment of the policy rate, University of Malawi’s (Unima) Chancellor College economics professor Ben Kaluwa, in an interview on Thursday expressed worry, describing the development as unfortunate.
“We have been analysing these things for years. In their [RBM] reports, they talk about these [inflation] tensions. This calls for proper measures to do what is right.
“The central bank has taken an approach which is appropriate to developed market economics and not applicable to the Malawian market situation. Unless this is revised, we will continue to experience such trends,” he explained.
On his part, Indigenous Businesses Association of Malawi (Ibam) president Mike Mlombwa, who has been a vocal critic of high interest rates, said in an interview yesterday the hike will worsen the economic status and kill businesses.
“It has been difficult for businesses to operate and realise profits with the current high interest rates. This is a worrisome development because we know that commercial banks will also raise lending rates, which will make it even harder for businesses to borrow money for various enterprises,” he said.
At the meeting, MPC maintained the Liquidity Reserve Requirement (LRR) at 7.5 percent.
The MPC also noted that despite a relatively healthy foreign reserves position in 2015 compared to last year and continued inflows from the tobacco auction floor, the kwacha depreciated sharply between July and August due to excess demand, speculative behaviour by market agents and an appreciating dollar.
The local unit officially traded at K563 to a dollar on Tuesday, according to RBM financial market development report on Wednesday. n