RBM's 16 percent policy rate

By Bryson Jumbe

Malawi has achieved remarkable economic progress especially on inflation which is currently at 7.7 percent.

The Reserve Bank of Malawi (RBM) reciprocated from this and other Government's economic achievements by reducing the policy rate to 16 percent.

It was (and it is) expected that commercial banks will follow suit and lower their lending rates on loans to customers.

But what does this 16 percent policy rate reduction signify?

The policy rate is a monetary policy instrument, and influences all other rates of interest.

It can be used either to expand or contract money supply in an economy.

In this case, it has been used as an expansionist policy in order to pump in money back into the economy.

That is, there is a limited supply of money in the economy.

This scenario was necessitated by a restrictionist policy to remove excess money in the economy in order to check inflation.

[But I have often argued that the blackouts have been a key factor and not an act of monetary policy]

RBM's reduction of the policy rate is intended to stimulate recoveryrecovery, level of production and demand.

If commercial banks lower their lending rates, more customers (individuals and businesses) would be incentivized to turn up for credit facilities, resulting in more money being supplied into the economy.

In turn, this would trigger a rise in economic productivity.

Hence it's imperative for players in the economy such as Government, financial institutions, business entities and households to be aware of the present economic trends and plan accordingly.

And it would come as no surprise if talk of a new bank note is reignited by policy makers.

However, more depends on other factors such as reliability of electricity supply since it has the power to cripple economic productivity.