Borrowers’ Nightmare: RBM Hikes Policy Rate to 24%
Amid economic tantrums that the country is going through, Malawians should yet again brace for tough times ahead as the Central Bank, Reserve Bank of Malawi has announced an upward adjustment of the policy rate.
The bank has adjusted upwards the rate by two percentage points from 22 percent to 24 percent.
The adjustment is the second of its kind by the Monetary Policy Committee (MPC) barely four months after a 400-basis points adjustment early this year.
In a statement released on July 27, 2023 signed by RBM Governor who is also MPC chairperson Dr. Wilson Banda, the Third Monetary Policy Committee Meeting revised upwards the policy rate as price pressures have intensified, such that inflation is projected to remain substantially above the medium-term target for longer.
Dr Banda said that the rate hike was necessary to contain demand and reduce inflation towards the medium-term target.
The hiking of the bank rate, the rate at which commercial banks borrow from the Central Bank as the lender of last resort, comes at a time when the authorities are battling a high inflation rate recorded at 27.3 percent as of June by the National Statistical Office (NSO).
The decision by the Central Bank to raise the policy rate is likely to have a major impact on the Malawian economy.
The higher interest rates will make borrowing from several lending institutions difficult and this could eventually slow economic growth.
It will also make it more expensive for consumers to borrow money, which could dampen demand.
On another front, the rate hike will be welcomed by some businesses and consumers, as it could help to bring inflation under control, the sole argument for the Central Bank to hike the rate.
The Centre for Social Concern (CfSC) is worried of the implications the hike is going to bring.
CfSC Programs Manager Bernard Mphepo says businesses that rely on credit to finance their operations may find it more difficult to obtain loans, which could lead to slower economic growth.
Mphepo thinks the default rate may increase due to the increase in the policy rate.
“Consumers may also find it more difficult to borrow money which could dampen demand for goods and services. This will have ripple effects on the lives of people,” says Mphepo.
Further, 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.
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