The Reserve Bank of Malawi (RBM) has raised the liquidity reserve requirement (LRR) ratio for domestic deposits to 10 percent in a move economic experts say will compel banks to increase interest rates.
The LRR ratio increase by 125 basis points means that 10 percent of commercial banks’ deposits will be held by RBM without earning interest.
The decision is contained in the Monetary Policy Committee (MPC) statement released on Friday, which followed the fourth MPC meeting held on November 4 2024 chaired by RBM Governor Wilson Banda.
The MPC maintained the policy rate at 26 percent citing growth of money supply, Lombard rate at 20 basis points above the policy rate and LRR ratio for foreign currency deposits at 3.75 percent.
The committee has projected that inflation rate, currently at 34.3 percent, will average 32.5 percent in 2024 largely due to persistent food inflation pressure at 43.5 percent, which is higher than non-food inflation at 22.3 percent.
In an interview yesterday, financial analyst Brian Kampanje said: “What it means is that if I take K200 million to the bank, 10 percent of that must be held by the RBM for free and not earn interest while the bank gives me interest per annum on the whole K200 million.
“Now banks will be forced to increase the base lending rate to cover for the increased LRR ratio.”
National Working Group on Trade Policy chairperson Fredrick Changaya, who was a member of MPC between 2017 and 2020, suggested the need to innovatively apply monetary policy in a coordinated way with fiscal policy to achieve a mixed approach,.
MPC is responsible for formulating and implementing monetary policy, thereby influencing the overall economic stability of the country.
