The Reserve Bank of Malawi (RBM) on Tuesday raised the bank rate by five percentage points to 21 percent confirming analysts’ fears that monetary authorities would succumb to inflationary pressures.

Market players on Tuesday said following the bank rate adjustment, base lending rates are likely to range from 27 to 30 percent from the current average of 24 percent.

The move to raise the bank rate—the rate at which commercial banks borrow from the central bank—comes almost a month after the rate was raised by three percentage points, or 23 percent, to 16 percent from 13 percent on May 11 soon after the 49 percent devaluation of the kwacha on May 7.

The hike also comes a month after the RBM on June 1 2012 opened a collateral free discount window accommodation for commercial banks to borrow at 18.5 percent to help financial institutions to cope with the liquidity squeeze currently hitting the banks.

Because of this facility and in view of the tight market liquidity, the commercial banks, two weeks ago, were also forced to raise their base rates to 23.5 percent from 17.5 percent, twice since the devaluation.

Inflationary pressure

The inflation rate has been rising sharply, with the May figure standing at 17.3 percent, according to the National Statistical Office (NSO).

The RBM in April also adopted inflation targeting method, which analysts warned at the time could result in another bank rate hike because they intend to align interest rates to match inflation targets.

Finance Minister Ken Lipenga, in the 2012/13 budget, has forecast an annual average inflation of 18.4 percent in 2012 from an annual average of 7.6 percent in 2011.

University of Malawi’s Chancellor College economics professor Ben Kaluwa said the bank rate raise was expected, taking into account the movement of economic variables such as inflation and exchange rates.

A sad turn

Consumers Association of Malawi (Cama) executive director John Kapito described the move by the RBM as sad.

He said the interest rates are going in the direction of the early 2000s when the rate of borrowing reached as high as 70 percent, which crowded out the private sector.

“That is not the direction we want to take. This move will create a lot of challenges. This means consumers will have to be paying more for borrowing which will greatly affect their well-being,” said Kapito.

In its economic review for June 2012, Nico Asset Managers Limited predicted that RBM will raise the bank rate, but said this will have implications.

“High lending rates could result in reduced private sector investment and growth. High borrowing costs may also result in increased risk of defaults of existing liabilities,” said the investment advisory firm in the report.

It said the increase in rates on the money market may result in investor shift from stock market to money market as rates become attractive, adding that new debt offers will also decline due to increased cost of borrowing.