Falling Kwacha, inflation to rise: Reserve Bank of Malawi raise bank rate

Reserve Bank of Malawi (RBM) has raised its policy rate back up to 25.0 percent as inflation is expected to accelerate to 25.4 percent in December due to rising food price and the depreciating kwacha currency.

Malawi’s headline inflation rate eased to 23.7 percent in September from August’s 24.5 percent, but the central bank said inflation in the second half of this year had generally been higher than in the second half of 2013 and the kwacha has depreciated faster than expected.

The kwacha was quoted at 6.3 to the U.S. dollar today, declining from around 6 at the end of August and 5.51 at the start of the year, a decline of 14 percent.

The RBM attributed the decline in the kwacha to continuing uncertainty surrounding the resumption of donor flows, increasing liquidity from government borrowings from the central bank and the recent negative returns on kwacha holdings.

“The Monetary Policy Committee (MPC) met on 30th October 2014 to review recent economic developments and decide on the monetary policy stance. The Committee observed that inflation outcomes for the second half of 2014 have generally been higher than during the second half of 2013.

“Looking ahead, inflation is expected to accelerate to 25.4 percent in December 2014, largely due to rising food prices and the depreciating Kwacha,” said RBM in a statament

The central bank’s foreign reserves dropped to US$463.4 million, or the equivalent of 2.4 months of imports in September from $478.9 million in August but was up from $447.3 million in September 2013. The country’s foreign reserves amounted to $760.2 million in September, down from $780.6 million in August but up from $744.2 million in September last year.

The central bank said inflation was expected to start decelerating in March 2015 due to better food supply and an expected seasonal appreciation of the kwacha, and it would review its policy stance at the next meeting of its monetary policy committee.