Cost of borrowing skyrockets, policy rate hits 26% – Capital Radio Malawi
19 June, 2024

Cost of borrowing skyrockets, policy rate hits 26%

Changaya: Authorities are not understanding dynamics of Malawi’s economics

Consumers should brace for tougher times ahead as the cost of production is set to rise even further following a policy rate hike to 26 percent.

The Reserve Bank of Malawi – RBM’s Monetary Policy Committee (MPC) effected the 200 basis points increase from 24 percent at its first meeting of 2024 citing relentless inflationary pressures.

It also resolved to maintain the Lombard rate at 20 basis points above the Policy rate and the Liquidity Reserve Requirement ratio at 7:75 for domestic currency deposits and 3.75 percent for foreign deposits.

“In arriving at this decision, the MPC observed that inflationary pressures have intensified, such that inflation is projected to persist before it starts to decline.

“The decision is, therefore, intended to counter inflationary pressures and restore price stability,” reads part of the statement.

The hiking of the rate would restrict local businesses from borrowing for production, thus negatively affecting the consumer, as goods would either become scarce or be sold at higher prices to recoup production costs.

Analysts have since expressed shock with the move saying the tightening stance is not paying off as it only raises poverty levels.

Before the meeting of the committee last week, economists were hoping the rate would be maintained at 24percent to monitor the impact of the recent hikes.

Economist and chairperson of the National Working Group on Trade Policy Fredrick Changaya described the decision as frustrating considering that Malawi’s inflation is not driven by demand.

“This is sad to the country because monetary authorities are not understanding the dynamics of Malawi’s economics such that they are obsessed with textbook theories that are only applicable in developed economies.

“We need to understand that Malawians are poor people who cannot demand much –and this leaves our inflationary pressure mainly on supply side.

“Now, raising interest rates at a time production levels are already low is suicide,” Changaya said.

The committee is projecting inflation pressure to intensify such that it would remain elevated above the five percent medium-term target.

Meanwhile, the bank expects economic growth at 3.2 percent in 2024, from 1.5 percent in 2023, supported by an increase in public investment and recovery in mining and quarrying despite threatening El Niño weather conditions and uncertain global economic and geopolitical environment.

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