National Bank of Malawi warns of continued high interest and inflation rates

The country’s largest bank by assets, National Bank of Malawi (NBM) has warned that the combined effect of the tight monetary policy and weak fiscal performance is likely to maintain the high interest rate and inflationary environment for some time.

This follows market data from the Reserve Bank of Malawi (RBM) that it mopped up liquidity of over K103.5 billion (about $258 million) from the money market from May 2 and June 12.

RBM is withdrawing money from the financial sector in accordance with the tight monetary policy that it is being implemented.

Money market operations are a primary means through which central banks implement monetary policy. The usual aim of open market operations is to manipulate interest rates by expanding or contracting money supply.

Professor Mathews Chikaonda: NBM board chair

Professor Mathews Chikaonda: NBM board chai

But in its economic report National Bank says day to day monetary policy conduct is signaling to commercial banks to exercise a lot of restraint in the provision of credit.

“To starve the market of liquidity, the monetary authorities are consistently introducing ad hoc measures around the lender of last resort function to force commercial banks to tighten and significantly lower credit,” NBM said.

The bank said although effective in achieving the objective, ad-hoc administrative limits on access to the discount window and the not so transparent changes of rules on a day to day basis is rendering liquidity management within commercial banks an almost impossible task.

“These ad hoc measures which can vary from day to day are imposing an inefficiency cost within the financial system including, mispricing of financial products. Fiscal slippages and lack of adjustment on the part of government have led to an increase in Treasury Bills rates,” NBM said.

The bank further said commercial banks have therefore been forced to increase their base lending rates from an average 35 percent to 40 percent to curb arbitrage profit opportunities whereby some customers can borrow from the bank and earn a decent margin by simply buying Treasury Bills.

But speaking to the press on the development, Bankers Association of Malawi (BAM) first vice-president Misheck Esau wore a brave face by saying liquidity has improved on the Malawi market.

“Liquidity has improved and this may be why the central bank has made such withdrawals since it is implementing an inflation targeting monetary policy. Most commercial banks are not stressed and are no longer borrowing from RBM. The improvement in the liquidity may induce a fall in interest rates because these two are related,” said Esau.

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