RBM defends policy rate
Monetary authority, Reserve Bank of Malawi (RBM) has said it is defending its policy rate, currently at 22.5 percent to guide interest rates by rejecting Treasury Bills (T-Bills) bids with yields above it.
The central bank in January this year scrapped off the bank rate and replaced it with a policy rate. Along with the policy rate, RBM introduced the Lombard rate—the rate at which liquidity stressed commercial banks borrow from RBM—pegged at two percentage points above the policy rate.
In a press statement this week RBM has indicated that in issuing T-Bills, government risk free securities, the central bank shall be guided by the investors yield compared to the ruling monetary policy rate.
The local monetary authority has further said that in any T-Bills auction no allotment shall be made at yields higher than the policy rate minus two percentage points. The maximum yield will, therefore, be 20.5 percent.
In a telephone interview on Monday, RBM spokesperson Mbane Ngwira explained that by defending the policy rate interest rates will be responsive.
“The policy rate is effectively a guide to the market. By defending the policy rate, the interest rates will fall or rise along with changes to the rate,” said Ngwira.
But since the introduction of the policy rate in January this year, RBM has sometimes been issuing T-Bills way above two percentage points below the policy rate.
Specifically, during the week ending May 30 2014, the T-Bill rate for the 182 days rate stood at 26.7 percent while the 364 days stood at 26.88 percent—some points above the policy rate which then stood at 25 percent.
Explaining why it has taken some time to defend the rate, Ngwira said that the RBM gave some time to market players to understand how the policy rate operates.
Authorities and analysts have often blamed government fiscal indiscipline for high T-Bills rates which have often prompted an increase in interests.
Early last year, T-Bills rates which hovered above 40 percent were blamed for high interest rates.
Last week ,RBM governor Charles Chuka while addressing a parliamentary committee on Budget and Finance, warned that lack of fiscal prudence in government is also contributing to high interest rates.
Chuka pointed out that without fiscal discipline, it is not possible to maintain simultaneously low inflation and low interest rates.
Last month, during a Monetary Policy Committee (MPC) meeting it was resolved to reduce the policy rate by 2.5 percentage points to 22.5 percent.
The MPC also resolved to reduce the Lombard rate from 27 percent to 24.5 percent.
The committee, however, observed that a larger policy rate reduction was possible.
In response to the policy rate cut, commercial banks reduced their lending rates.
