For the second time in five months, Reserve Bank of Malawi (RBM) yesterday slashed the policy rate—a key driver of interest rates on loans—by 100 basis point, a move that is expected to provide relief to borrowers.
RBM has, however, maintained the Lombard rate at 0.4 percentage points above the policy rate, the liquidity reserve requirement (LRR)—a fraction of bank deposits that commercial banks are required to keep at the central bank—local deposits at five percent and the LRR on foreign currency deposits at 3.75 percent.
The decisions announced by RBM Governor Dalitso Kabambe at a news conference in Blantyre pushed the policy rate from 14.5 percent to 13.5 percent.
While helping make more credit available and cheaper to firms and households, both measures reflect a loose monetary policy stance that, however, is fraught with risks, especially in an election year when spending will likely skyrocket.
Practically, the decisions also mean injecting money supply in the economy that the central bank may be forced to mop up in the not-so distant future.
On the other hand, inflation has remained in the single digit with the central bank projecting an average of eight percent in 2019, 0.5 percentage point lower than projected during the first Monetary Policy Committee (MPC) sitting in 2019.
This is, according to the second sitting of the MPC, on account of a slowdown in food inflation as the country has been estimated to register a maize surplus of about 233 035 metric tonnes (MT) while non-food inflation is hoped to benefit from the relatively tight monetary policy, exchange rate stability and favourable international crude oil prices.
In January, MPC reduced the policy rate by 1.5 percentage points from 16 percent to 14.5 percent.
This was 13 months since MPC last trimmed the policy rate in 2017.
At the news conference yesterday, Kabambe said the MPC noted that the projected improvement in macroeconomic outlook for 2019 remains firm, with inflation projected on a downward trend, brushing off fears that the tripartite elections, due in three weeks, could weigh down on the achievements.
Reacting to the development, Economics Association of Malawi (Ecama) president Chikumbutso Kalilombe said the move was expected considering the recent macroeconomic indicators’ trend and also owing in part to the forward looking monetary policy approach adopted by the RBM last year.
He, however, said the decision will be meaningful if it results into affordability of credit which leads to growth in the sector as it increases real economic activity in terms of business.
“As recently lamented by the RBM governor that does not seem to be the case as yet. This points to the fact that apart from adopting the right macroeconomic policy approach other factors also need to be congruent to this if we are to see this positively impacting on the economy,” he said.