‘Policy lending rate hikes by RBM will add more pressure on borrowers’

* The current level of lending rate is the highest since 2017–Chief Economist Chifipa Mhango

* And clearly highlights the difficult path the Malawi economy is under currently

By Duncan Mlanjira

Revered economist, Chifipa Mhango says the hiking of policy lending rate by the Reserve Bank of Malawi (RBM) by 200 basis points, from 22% to 24%, did not come as a surprise as this is what he already projected.

He said “in an economic environment where the currency is under continuous devaluation, that alone adds more inflationary pressures”.

“Much as the latest inflation rate eased to 27.3% in June 2023 from a high of 29.2% in May 2023, the level is well above the RBM target of 5%. That alone is concerning on how this will be contained using a monetary policy instruments such as lending rates when, especially  food inflation rate remains elevated at 37.2%.

“The current level of lending rate is the highest since 2017, and clearly highlights the difficult path the Malawi economy is under currently.”

He further said RBM has since April 2022 hiked rates by 12%, from the 12% to 24%, thus representing 1,200 basis points.

“It is also concerning that Malawi Government is still not able to manage the fiscal challenges, as the  deficit widens, thus implying revenue generation is weak and limited, while spending appetite remains high.

“It is, therefore,  imperative that Malawi Government plays its role in creating a conducive environment for economic expansion while also defining its policy clearly with actionable items around expenditure management.

“What RBM is doing to raise interest rates is a normal and predictable policy reaction, guided by the inflation rate outlook. However, if the other inflation pressures are as a result of mismanagement of the economy on the fiscal front, then that needs urgent reflection on the part of Malawi Government.

“Otherwise the country’s consumers and businesses alike are heading for a tough time on borrowing costs,” said Mhango, who is Chief Economist for Don Consultancy Group of South Africa.

At its meeting on July 6, RBM’s Monetary Policy Committee (MPC) noted that “the performance of the economy remained weak on account of adverse weather shocks; lingering effects of the Russia-Ukraine war; prolonged foreign exchange shortages and the associated exchange rate depreciation; as well as fiscal deficits”.

“The Committee resolved that a monetary policy response is required to contain demand and reduce inflation towards the medium-term target.

“Therefore, the MPC decided to increase the Policy rate by 200 basis points to 24.0%, and the Liquidity Reserve Requirement Ratio (LRR) ratio on domestic deposits by 200 basis points to 7.75%.

Meanwhile, Governor Wilson Banda said, “the Committee maintained the LRR ratio on foreign currency deposits at 3.75% and the Lombard rate at 20 basis points above the Policy rate”.

“The Committee arrived at this decision while being mindful that the impact of the previous monetary policy decisions may not have been fully transmitted into the economy.

“However, the MPC resolved that taking further action was necessary to continue dampening the rising inflationary pressures and re-anchor inflation expectations while supporting the economic recovery process.”