Malawians reeling under a biting economic environment should brace for more hardships as the Reserve Bank of Malawi (RBM) has adjusted upwards the policy rate by four percentage points from 14 percent to 18 percent.

As a key driver of interest rates on loans, the decision will have ripple effects as commercial banks will likely implement reciprocal adjustments to the price of loans.

RBM headquarters in Lilongwe

In a statement published last evening, RBM Governor Wilson Banda said the Third Monetary Policy Committee (MPC) Meeting of 2022 revised upwards the policy rate by 400 basis to restore price stability, which is essential for reviving and sustaining high economic growth.

Practically, the  decisions mean that the RBM is trying to reduce money supply in the economy by increasing the cost of borrowing.

The hiking of the bank rate, the rate at which commercial banks borrow from the central bank as lender of last resort, comes at a time authorities are battling a high inflation rate of 25.9 percent as of September, according to National Statistical Office (NSO).

Banda said the MPC noted that high inflation could frustrate the country’s economic recovery process while eroding the purchasing power of households.

He said: “In the absence of measures to contain inflation, rising prices will continue to diminish the welfare of households.

“The MPC, therefore, considered expeditious tightening of monetary policy stance as further delays could risk entrenching inflation expectations.”

However, the MPC has maintained the Lombard rate, the interest rate charged by central banks when extending short-term loans to commercial banks, at 20 basis points above the policy rate and the Liquidity Reserve Requirement ratio on both domestic and foreign currency denominated deposits at 3.75 percent.

Reacting to the move, Catholic University economics lecturer Hopkins Kawaye said the decision was expected as it is meant to ensure price stability given the rising inflation.

“This is certainly meant to contain the pressure on prices which have been rising for some time. The RBM is trying to reduce the money in circulation and contain the rising costs of goods. It could have actually been surprising to see them not acting when all parameters were pointing to a possible hike in the policy rate,” he said.

To the business community and households, the RBM decision is another blow as high policy rate will mean high interest rates and high financing charges for both existing and future credit lines.

But Consumers Association of Malawi executive director John Kapito said the move is a worrisome development for bank customers are already struggling to service their loans.

“This is a disaster as our breathing space has just been narrowed. Prices will obviously go up because borrowing will be too high and beyond the reach of many Malawians,” he said.

The policy rate was static at 12 percent since 2021 and the central bank indicated that was was meant to support economic recovery from the Covid-19 pandemic.

However in view of rising inflation, the central bank dur ing the second MPC meeting in May this year hiked the policy rate to 14 percent.

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