Monetary policy measures under scrutiny

The recent decisions by the Reserve Bank of Malawi (RBM) to revise some monetary policy measures such as the policy and Lombard rates, among others, have divided opinion with some stakeholders urging the move are positive and negative on the economy.

The decisions that Governor Dalitso Kabambe—announced at a press conference in Blantyre on January 30—saw the policy rate revised downwards from 16 percent to 14.5 percent and Lombard Rate from 200 basis points to 40 basis points above the policy rate to 14.9 percent.

RBM head quarters

Further the central bank having noted that previously policy rate adjustments were not fully transmitted to the rest of the economy, instructed banks to use the Lombard Rate as the base lending rate.

Dowa West legislator, Alexander Kusamba Dzonzi, who recently tabled the infamous Interest Capping Bill, said on Tuesday the move by RBM is an indication that country needs and can progress with lower interest rates.

“What is interesting is while the gesture is commendable it begs the question; By reducing the policy rate is RBM trying to close [some] banks? If not, then what some banks have been saying that if policy rate goes down then they will close shop are lies, geared on trying to milk innocent Malawians,” he said.

However, Chancellor College economics professor Ben Kaluwa said the rate cut is a clever move by government to please the voices crying out for lower rates. 

“Central bank has used this window to ensure that [they] are compliant with people’s demands, but there is a problem. Reducing the Lombard Rate and making every bank use this as a  benchmark may bring in problems.

“Some banks have different average costs of funds so if supposing that a bank’s cost of funds are at an average of 15 percent, there will be a problem because the Lombard Rate will be lower than the cost of funds for such banks in the end requirement may squeeze other bank’s profitability. We don’t know what the fate will be for individual banks but it will be interesting for the central bank to balance banks worth the capping with those not worth,” he said.

But defending RBM’s stance Kabambe stated the Monetary Policy Committee’s assessment is that the stance of monetary policy remains adequately tight and monetary policy actions will continue to gradually anchor inflation expectations without necessarily jeopardising government’s economic growth agenda.

“In setting the monetary policy stance, emphasis is placed on closing the gaps between the RBM’s projected inflation and the target. 

“While greater emphasis in this framework is on pre-empting risks to macroeconomic outlook, a careful balance is applied to ensure that historical as well as current developments also feed into the policy process,” he said.

He said the approach of the MPC is to look through the first-round effects and focus on the possible second-round effects of supply side shocks.

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