The Reserve Bank of Malawi (RBM) base lending rate—a monetary policy instrument that consequently determines interest rates—has been maintained at 25 percent, the Monetary Policy Committee (MPC) minutes indicate.
Minutes of the MPC meeting held on Thursday and chaired by RBM Governor Charles Chuka indicate that the committee resolved to maintain the high base lending rate, upheld since December 2012, to sustain the tight monetary policy stance against the backdrop of emerging risks to inflation.
The upholding of the RBM base lending rate at 25 percent means that commercial bank base lending rates will still remain prohibitive, denying businesses and consumers access to finance.
Commercial bank lending rates shot to over 40 percent towards the end of this year’s first quarter due to liquidity problems and high treasury bills yields. Most commercial banks have, however, reduced their lending rates by two percentage points due to falling inflation and an improvement in liquidity.
The MPC, according to the minutes, welcomed the deceleration in inflation to 23.3 percent in August 2013 from 25.2 percent in the preceding month but cautioned that inflation is expected to be higher than earlier forecasted as prices of food, fuel and utility tariffs pick up.
According to the 2013/14 budget statement, inflation was expected to slow down to 14.2 percent by December 2013 and to seven percent by December 2014.
However, recently food prices, water and electricity tariffs have been rising.
Figures released by the Ministry of Agriculture and Food Security show that average price of maize—a staple food to many—jumped by about 18 percent to K115 per kg in August from K97.70 in July. Food and non alcoholic drinks comprises 50.2 percent of the country’s inflation calculations.
The MPC also notes that the tight monetary policy is taking a toll on private sector credit. The minutes indicate that gross credit to the private sector has been declining, as annual growth dropped to 8.5 percent in August 2013 compared to an annual increase of 29.9 percent registered in August 2012; a reflection of the tight monetary policy stance needed to stabilise the exchange rate and bring down inflation.
The MPC resolved that to contain the inflationary impact of this liquidity, the committee underlined the need for intensified monetary operations.