EIU sees policy rate at 26%
The Economist Intelligence Unit (EIU), a research and analysis division of the Economist Group of the United Kingdom, has projected that the policy rate will increase by 400 basis points to 26 percent amid rising inflation.
The hike of the policy rate, which is the key driver of interest rates on loans, could in turn compel commercial banks to raise their interest rates from the current 21 percent, raising the price of loans even further.
In its June 2023 country report for Malawi, the economic think-tank observes that Malawi’s foreign-currency shortages are making imports of food and fuel costly and could prompt currency devaluation, driving up inflationary pressures to an average 30.6 percent from an average of 21 percent in 2022.
At 30.6 percent, the inflation projection is above the Reserve Bank of Malawi’s (RBM) projection of 24.5 percent in 2023.
Reads the EIU country report in part: “Continuously rising headline inflation, so far, this year, driven by limited foreign currency, has caused shortages of food and fuel and we expect the RBM to raise interest rates aggressively.”
In April this year, RBM raised the policy rate by 400 basis points from 18 percent to 22 percent, citing rising inflation.
Speaking in an interview yesterday, Chamber for Small and Medium Businesses Association executive secretary James Chiutsi observed that with an already difficult operating environment, a potential policy rate hike could be retrogressive to the development of the sector.
He said: “SMEs are already struggling from the negative impacts of Covid, cyclones and low international investments. Already, we find difficulties to access loans.
“Its bad news for small businesses at a time we thought we would start growing again. So, it’s worrisome to SMEs.”
Small Scale Business Operators Association of Malawi secretary general Tennyson Mulimbula observed that despite this being the harvest season when businesses are supposed to cash in, the situation is different.
“A potential hike in the policy rate would make it worse as this would mean high cost of fiancé at a time of slowed business.”
Economist Bond Mtembezeka said the inflation outlook does not look inspiring.
RBM is expected to hold its third Monetary Policy Committee (MPC) meeting of 2023 between July 26 and 27.
RBM spokesperson Mark Lungu was yet to respond to our questionnaire as went to press yesterday.
But in a statement of the Second MPC of 2023, RBM Governor Wilson Banda said MPC noted that the inflation outlook had worsened due to domestic shocks, necessitating a rise in policy rate.
