The Reserve Bank of Malawi (RBM) has reduced Policy Rate from 16 percent to 14.5 percent.

The bank has also reduced Liquidity Reserve ratio to 5 percent from 7.5 percent.

This follows the first Monetary Policy Committee meeting of 2019 from 29th January to 30th January, 2019.

According to RBM Governor Dalitso Kabambe, the committee cut the policy rate —the rate at which commercial banks borrow from the central bank as lender of last resort— after reviewing the  prevailing macroeconomic developments.

In arriving at this decision, the Committee observed that risks to inflation experienced in 2018 are dissipating and that the macroeconomic outlook for 2019 is favourable.

Kabambe added that from now onwards, commercial banks will use the Lombard rate which is at 14.9 percent as the base lending rate. The Lombard rate – the interest rate RBM charges for short-term liquidity loans to commercial banks – was previously at 18 percent.

RBM has ordered that the Lombard should be the base lending rate to ensure that policy rate adjustments are fully transmitted to the rest of the economy, something that was not happening in the past.

Meanwhile, the central bank has said that it expects commercial banks and other lending institutions to also reduce their rates.

“The Committee therefore joins the rest of the economy in expecting corresponding responses from the commercial banks and other lending institutions.

“These policy initiatives are expected to assist the financial sector and the private sector to harness synergies and effectively contribute to economic growth,” Kabambe said.

The cut in policy rate comes weeks after the interest rate capping bill which seeks to put a limit on interest rates charged by banks was blocked in Parliament.