RBM hikes Policy rate

LRR Ratio on Domestic Currency Deposits…….

The Reserve Bank of Malawi (RBM) has announced that the Monetary Policy Committee has hiked the Policy Rate and Liquidity Reserve Requirement (LRR) Ratio on Domestic Currency Deposits.

According to the statement signed by Chairperson of the Monetary Policy Committee, Dr T Wilson Banda, the Policy Rate- a rate at which the central bank pays or charges commercial banks for their deposits or loans which consequently affects the interest rates that commercial banks apply with their customers, both borrowers and depositors, has been increased by 400 basis points to 22.0 per cent while Liquidity Reserve Requirement (LRR) Ratio on Domestic Currency Deposits has been increased by 200 basis points to 5.75 per cent.

The Monetary Policy Committee (MPC) held a meeting from 26th to 27th April to revenue the current economic development where they came into agreement to hike the two things but the Liquidity Reserve Requirement (LRR) Ratio on Foreign Currency Deposits and Lambard Rate have been maintained at 3.75 per cent and 20 basis points respectively.

“The MPC noted that the inflation rate outlook had worsened the last MPC meeting,” said Banda. “This is mainly due to unforeseen Domestic shocks. In particular, the occurrence of Cyclone Freddy in the Southern Region of Malawi and localised drought in the Northern Malawi had worsened the food supply prospects and strengthened adverse supply-side inflationary pressures.”

At the meeting, the MPC also noted that the need to rehabilitate the infrastructure damaged by the Cyclone [Freddy] has the adverse impact of amplifying aggregate demand and fuelling inflation, requiring further tightening of the Monetary Policy to dampen the demand effects.

The Policy Rate or Repo Rate has hiked fromd 18.00 % pa in Mar 2023 to 22.0 % this month.

A change in the policy rate has an impact on people’s purchasing decisions. The change in spending affects the overall prices of goods and services, known as inflation.

The impact of a change in the policy rates varies depending on whether we are borrowers or depositors. When the policy rate is reduced, the borrowers must pay lower interest for their loans, and the depositors will receive less interest from their deposits. Thus, as the policy rate falls, we are more likely to borrow due to cheaper borrowing costs, and we tend to save less and spend or invest more.

The reduced interest rate will also boost our wealth if we own assets, such as stocks or real estate. Since a low deposit rate encourages consumers to invest in higher-yielding assets, such as stocks and real estate, the value of these assets then rises. As a result, holders of these assets become wealthier and more willing to spend.

In conclusion, a decrease in the policy rate encourages people to spend money. An increase in the policy rate, on the other hand, discourages people from spending. These purchasing decisions will influence the price of goods and services according to the law of demand and supply.

Following the development, Malawi becomes the country with highest policy rate in Southern Africa, beating Zambia’s 9.25%, South Africa’s 7.75%, Mauritius 4.50%, Botswana’s 3.75%.