Commercial banks have maintained the reference rate, an interest rate benchmark, at 17.3 percent for April, published statements show. At 17.3 percent, the reference rate is 0.7 percentage points away from the bank rate, the rate at which commercial banks borrow from the central bank as the lender of last resort, which was adjusted to 18 percent in October last year from 14 percent.

Consumers Association of Malawi (Cama) executive director John Kapito, while indicating that the move partly calms the market, said interest rates remain a concern to Malawians.

RBM headquarters in Lilongwe where monetary policy decisions are made

He said: “This sort of calms the market but the fact remains that we still have high interest rates that we feel slow down the growth of the economy because we laterally do not have cheap money from our institutions to allow businesses to borrow and produce at relatively competitive prices.

‘With such interest rate, one thing for sure is whatever government might wish to do to grow this economy is just a wish and nightmare because no one would want to invest in a country where interest rates and cost of production are just too high, and much of it pushed by poor policies of the central bank,” he said.

Chamber for Small and Medium Business Association executive secretary James Chiutsi also observed that access to formal credit from banks continues to be a challenge regardless of the move as borrowing from banks is expensive.

“Access to finance for SMEs from banks has been an issue for some time. We fail to borrow because the rates are very prohibitive. This is pronounced even more recently, as lending rates are on the higher side now.”

The reference rate has been on an upward spiral since the second half of last year when the RBM made back-to-back adjustments of the policy rate which saw the reference rate move from about 12 percent to the current 17.3 percent. 

RBM governor Wilson Banda, during the first Monetary Policy Committee (MPC) in February indicated that in view of the rising inflation rates the central bank may be compelled to tighten the monetary policy further.

Economists have, however, indicated that the traditional monetary policy approach which Malawi follows, where interest rates rise as inflation increases, does not work for the good of the Malawi economy.

According to economic statistician Alick Nyasulu, such an approach works in advanced economies.

“This thing does not work and it is a futile exercise that only succeeds to raise the cost of finance by the few businesses that access formal means of financing.

“The average household in this country borrows from informal channels and all monetary policy tricks of interest rate adjustments in view of inflation are not practical. It’s textbook economics whose efficacy in our set up is questionable,” he said.

The post Banks maintain reference rate first appeared on The Nation Online.