Policy rate hike threatens consumer demand—CfSC

The Centre for Social Concern (CfSC) says the Reserve Bank of Malawi’s (RBM) decision to raise the policy rate will discourage consumer spending, thereby negatively affecting sectors that are dependent on consumer demand.

In its analysis titled ‘Balancing stability and socio-economic impact: Reserve Bank of Malawi’s decision and future considerations’, CfSC projects officer Kondwani Hara said while the centre appreciates that RBM is worried about curbing rising inflation, the country’s inflation is not necessarily influenced by a lot of cash in the economy.

He observed that elevated interest rates can discourage consumer spending as the cost of borrowing becomes more expensive and that new borrowers may face higher costs when seeking credit, impacting their ability to finance major purchases.

Said Hara: “A careful analysis of the economy of Malawi will reveal that our inflation is not due to a lot of cash in the economy.

“The main cause of our inflation is the exchange rate of our kwacha and the fact that we depend a lot on imported goods.”

He said when the kwacha weakens, prices of imported goods automatically rise, causing high inflation. He advised the central bank and government to work on stabilising the exchange rate and increasing local production.”

Last week, RBM raised the policy rate by 200 basis points to 26 percent.Following the policy rate hike, commercial banks have also raised their reference rate to 24.9 percent from 23.6 percent.

This means that with the current reference rate, which forms part of interest rates charged by banks on loans, borrowers will now be paying an average of between 33 and 35 percent to service their loans.

RBM director of economic policy and research Kisu Simwaka on Tuesday justified RBM’s policy rate hike, saying the current circumstances will ensure durable recovery of the economy.

In an interview on the sidelines of the First Monetary Policy Committee Technical Meeting in Blantyre, he said the whole idea of raising the policy rate is to ensure that inflation declines as the economy recovers.

Simwaka said the central bank targets to get to single digit inflation, averaging plus/minus five percent by 2026, but observed that under the present circumstances, inflation will start dropping to the 20s by mid this year.

The acceleration in inflation, according to RBM, reflects the pass-through effects of the recent 44 percent exchange rate re-alignment and the subsequent adjustment in energy prices.

The inflation rate is currently at 34.5 percent.