Reserve Bank of Malawi develops ‘modernised’ monetary policy framework

The Reserve Bank of Malawi (RBM) has over time, developed an improved and modernised monetary policy frameworks, tools and instruments consistent with the prevailing structure and operations of the financial system, the central bank Governor Daliso Kabambe has said.

Kabambe said this on Monday during the Monetary Policy Conference at Nkopola Lodge in Mangochi, saying, there are currently three notable monetary policy frameworks that have been developed and are being used extensively.

He said these include; the Exchange Rate Targeting, Monetary Aggregate Targeting and Inflation Targeting.

“The choice of any type of these frameworks is guided by peculiarities of individual economies. For instance, for countries such as Malawi, which have chosen independent monetary policy frameworks, we only have two options — either; Monetary Aggregate Targeting, where a Central Bank directly influences the quantity of money in the economy (this is based on the quantity theory of money or the so called Fischer equation of exchange);

“Or Inflation Targeting, where a Central Bank directly influences the level of interest rates leaving monetary aggregates play out an informative role (this is mostly implemented via the Taylor type rules),” said Kabambe.

The Governor pointed out that as the structure of the financial system radically changes with the inclusion of several other players such as Tech Companies issuing their own digital currencies, RBM will need to “rethink the way we will conduct monetary policy.”

On financial stability, Kabambe said the Central Banks have over time developed regulatory instruments, frameworks and tools which are being used to regulate the financial sector to guarantee financial stability of the banking sector and entire financial system.

“As a matter of fact, commercial banks are some of the known institutions which are heavily regulated to ensure that depositors’ funds are properly protected at all times.

“With the coming in of the other entities, such as Tech Companies, which are not regulated by Central Banks currently, it will be important to relook at the frameworks and legislations to suit the new framework and guarantee financial stability,” he said.

Kabambe said the Nkopola Lodge conference is, therefore, meant to deliberate the matters and provide insights into how to move forward as a country.

“Similar debates are also taking place in all other countries across the world and the RBM stands ready to listen to all constructive suggestions and views on the subject matter.”

He said the conference comes at a time when the global economy has lost momentum and slowed down following a decade and half of extraordinary economic performance.

“We live at a time the United States of America is reviewing its trading arrangements with partners; the United Kingdom is reviewing its relationship with its sister European Union nations and the global multilateral trading system under the auspices of the World Trade Organisation (WTO) is undergoing great uncertainty.

“The second headwind is the monetary policy normalization in advanced economies aimed at addressing the prevailing negative interest rates. This is also complemented by the unwinding of Central Banks balance sheets. Both these developments are leading to global monetary policy uncertainty and tightening of financial conditions,” said Kabambe.

He pointed out that the third headwind is coming from China where the authorities are introducing necessary deleveraging reforms for rebalancing their economy and making growth more sustainable.

The last headwind, he said,  is arising from the current unprecedented levels of stockpiles of debt.

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