RBM Keeps Interest Rate at 24% While Tightening Bank

The Reserve Bank of Malawi (RBM) has held its benchmark interest rate steady at 24% in its latest monetary policy decision, signalling a pause in the aggressive tightening cycle that began in 2023. However, the central bank has simultaneously introduced stricter controls on bank lending—a dual-track approach designed to combat persistent inflation while preventing a credit collapse that could derail economic recovery.

Malawi's inflation trajectory remains precarious. After peaking above 30% in mid-2024, headline inflation has moderated to the low-to-mid 20s, but core inflation—stripping out volatile food and fuel prices—remains sticky. The RBM's strategy reflects a delicate balancing act: rates at 24% are punitive enough to discourage speculative borrowing and capital flight, yet holding them steady signals the worst of the tightening cycle may be behind the economy.

## Why is the RBM tightening bank lending instead of raising rates further?

A frozen policy rate combined with tighter lending standards suggests the RBM believes the problem is no longer *the cost* of credit but *the volume*. Banks have been accommodative, extending credit to absorb liquidity as the central bank drained money supply. By imposing sector-specific lending caps, loan-to-deposit ratios, and stricter collateral requirements, the RBM aims to reduce credit-fuelled demand without pushing already-fragile businesses into insolvency. This is critical in a country where agriculture, tobacco, and small-scale manufacturing dominate employment.

## What does this mean for Malawi's fiscal position?

At 24%, borrowing costs are crushing for the government. Malawi's debt servicing burden has climbed to nearly 40% of tax revenue—unsustainable by IMF standards. The RBM's pause on rate hikes, while modest relief, is insufficient without fiscal consolidation. The government must accelerate revenue collection and cut non-essential spending. Without parallel fiscal reform, monetary policy alone cannot restore macroeconomic stability.

## How will investors respond to this holding pattern?

Foreign direct investment into Malawi has slowed as investors seek clarity on inflation trends and currency stability. The Malawian Kwacha has depreciated roughly 15% against the US dollar in 2024, reflecting external imbalances and capital outflows. A sustained 24% rate without further monetary tightening may reassure some investors that inflation has peaked, but it also signals limited room for rate cuts—meaning no relief for Kwacha-denominated borrowers in the near term. Real interest rates (nominal rate minus inflation) remain deeply positive, making domestic savings attractive but investment yields thin.

The tightening of bank lending is the hidden story. If enforcement is rigorous, this will slow credit growth from the current 8-12% annual rate toward single digits, compressing broad money supply. For working capital-dependent sectors like manufacturing and retail, this translates to rationing and higher financing costs despite an unchanged policy rate.

**Bottom line**: Malawi's central bank is betting that inflation is responding to monetary restraint and that growth can stabilise under a holding pattern. But without fiscal discipline from government and recovery in export demand (particularly tobacco), this equilibrium is fragile. The RBM may face pressure to cut rates in H2 2025 if inflation retreats faster than expected—or to raise them again if currency weakness reignites price pressures.

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