Reserve Bank of Malawi (RBM) Governor Charles Chuka has said the continued depreciation of the Malawi kwacha will eventually reach its limits, saying there would come a time when the price of foreign currency will hit the ceiling, beyond which nobody would afford to buy it.
Addressing members of the Association of Business Journalists(ABJ) in Blantyre on Monday evening, Chuka said he actually foresees the Malawi kwacha appreciating come April when the country would have resumed its tobacco and other exports.
“I know some people are predicting that the kwacha will fall to as much as K400 or K500 to the US [United States] dollar. But look, who can afford to buy US dollars at that price? I would say nobody. Not even companies. So even the forex trader would have to limit the price adjustment or else, they would have nobody to buy their forex,” said Chuka.
He was optimistic that the country’s earnings from tobacco would tremendously improve next year because of increased production motivated by better prices of the leaf last season.
“There are many [growers] who are preparing to produce tobacco and we expect the country’s earnings from tobacco to improve significantly,” he said.
Meanwhile, Chuka told the journalists that it is too early for the country to reduce the bank interest rates after it was increased early this year.
Speaking on the sidelines of the ABJ meeting, Chuka said the decision as to whether there will be another increase or decrease of the bank rates lies in the hands of the Monetary Policy Committee (MPC) scheduled for next week.
“The decision on that is not always straight forward because we are also interested in making sure that the economy is functioning to make sure that the interest rates come down and, at the same time, we are also aware of the need for us to contain the inflationary pressures and bring down inflation and stabilise the economy,” he said.
Chuka said there are conflicting objectives that have to be dealt with during the meetings.
He was hopeful that there will be a way to reduce the interest rates soon.
He said, however, that with the way the inflation is moving at the moment, it will be difficult to say which way the bank rate would be heading to and that he would wait for the bank’s analysis of the situation before committing himself on the matter.
“Am not sure until I have the analysis for the next meeting which I haven’t yet seen but my faith is that with the inflation at 25 percent, if it was my decision only, I think that it is too early to reduce the interest rate but we will see based on the analysis as it may come out that we have reasons to reduce them,” said Chuka.
He further explained that the spread between the lending rate and deposit rate fixed deposit rates has narrowed in the country because the banks have had to offer very high interest rates to the fixed depositors in order to address the situation.
Chuka said, however, that savings rate and the lending rate gap is still wide.
“This is because the savings rate is like the current account for most people. The savings do not increase because you have increased the savings rate but with a lot of other deposits, particularly the fixed deposits by the corporate sector, those have narrowed substantially and that’s a very important development that has come out,” he said.
He said when banks are tight in cash, the lending and deposit rate spread can change and can also narrow overtime as the country grows and that as the banks lend out their money, the spread will narrow.
Chuka said banks are businesses, so they have to react to signals from the central bank.
“When we said banks that continue to borrow from us despite borrowing from the discount window will have to increase the interest cost, we were simply sending a signal that they cannot keep on borrowing from the central bank because that is not the job of the central bank,” said Chuka.
He said RBM was simply sending a message that banks needed to correct their problems when the increase was affected.
“In fact, you will be surprised that the move had an effect of correcting the house. The banks reacted differently following the interest rates increase with some raising the lending rate as high as 40 percent. All they were saying is that they did not have money to lend out. Sometimes when you have nothing to lend, you can raise the lending rate to any level because it does not matter because there is no-one to borrow from you anyway,” he said.
The bank rate, which is the price at which banks and discount houses borrow from the central bank, was last revised on May 11, 2012 when it moved to 16 percent from 13 percent.