Inflation eroding consumers’ savings, say economic experts

 Consumers are losing out money on their deposits in the long-term as the spread between the inflation rate and savings rate continues to widen.

Reserve Bank of Malawi (RBM) data shows that inflation rate has risen from 19.1 percent in May 2022 to 29.2 percent in May this year while the average saving rate has dropped from 4.02 percent to 3.67 percent over the same period.

Speaking in an interview, Consumers Association of Malawi executive director John Kapito said the growing spread between the inflation rate and the average saving rate is putting off consumers from saving with commercial banks.

He urged RBM to be more agile and close the gap between the inflation rate and the savings rate.

Said Kapito: “When the banks, in response to 

 changes in government policy rates, raise the repo rate when inflation is high and do nothing to protect the consumer, people will not save.

“When people do not save, the commercial banks have a small pool of resources to lend to other investors.”

He also faulted the central bank for failing to regulate the banking sector effectively, leading to banks capitalising on the policy changes made by the government to post windfall profits.

In the past 14 months, the central bank raised the policy rate, the rate at which commercial banks borrow from the central bank, by 800 basis points to 22 percent as at the end of June 2023 from 14 percent in May 2022 to contain inflation.

On the other hand, the reference rate, the rate which commercial banks use to set their lending rates, has grown 6.5 percentage points from 13.5 percent in May 2022 to 20 percent in May this year. As a result, interest on consumer loans have risen to at least 32 percent.

Catholic University economics lecturer Greenson Nyirenda said the banks are justified to raise the lending rates when RBM raises the policy rate, but questioned whether the central bank’s policy rate raise has achieved the intended outcomes.

He said: “RBM is constantly raising the policy rate to curb inflation which I find theoretical and baseless.

“Raising the policy rate only benefits the commercial banks.”

Economic analyst Bond Mtembezeka said commercial banks keep the savings interest rates low while raising the lending rates because of the risk profiles of their consumers.

“Ordinarily, people use their savings account for transactions as opposed to actual savings which leaves little money for the bank to work with,” he said.