Experts have hinted that worsening liquidity squeeze and a rise in short term interest rates including interbank rates will trigger a rise in lending rates and slowdown economic growth.
The October Nico Asset Managers economic report released recently indicates that liquidity levels which improved in the previous months—consequently causing a fall in lending rates—appear to have started to decline and increasing pressures on short term interest rates to rise.
The report notes that interest rates in October 2013 have started increasing from September 2013, however, compared to October 2012 the interest rates are still considerably high and cautions that this may deter growth in the short term.
The Blantyre based investment advisory firm cautions that higher interest rates are likely to increase the cost of borrowing.
“Higher borrowing costs may also result in higher risk of defaults of existing liabilities. If people are deterred from borrowing there will be less demand for goods in the economy which will in turn reduce inflation rates through a fall in prices,” reads the report in part.
According to available statistics, commercial banks have recently been experiencing liquidity problems with the banks turning to the Reserve Bank of Malawi’s (RBM) discount window.
The interbank lending rates have also risen from around 16 percent towards the end of August to close to 25 percent end October, according to RBM statistics.
Nico Asset Managers, however, indicates that the recent discount window borrowing has been injecting liquidity into the market.
It further notes that so far banks have maintained base lending rates at a range of 35 percent to 38 percent after reducing it early July.
However, this week FDH Bank announced a revision of its interest rates effective November 19. The bank’s one month fixed deposit dropped from 18 percent in September to 15 percent, on three months fixed deposit increased from 15 percent to 18 percent and on six months fixed deposit with balances above K5 million (about $12 500) from 15 percent t 20 percent.
Last week RBM said it will further tighten the monetary policy to address challenges due to delayed disbursements by the country’s donors through the use open market operations, its bank rate, and foreign exchange operations.
Experts have cautioned while businesses have feared that the aid freeze may prompt domestic borrowing and induce a rise in interest rates.
