Reserve Bank of Malawi maintains bank rate at 16%

The Reserve Bank of Malawi (RBM) has maintained monetary policy  —also known as the bank rate—at 16 percent to consolidate possible build-up of inflation risks and ensure inflation rate remains in single digit.

The central bank’s Monetary Policy Committee (MPC) made the decision after a Macro-economic Conditions Review Meeting where they observed  that inflation edged up to 9.1 percent, on account of rising food and utility prices.

The decision of the monetary policy is done after a stakeholders meeting every three months and this is the third time the two policy rate indicators was also pegged on the same rate.

RBM Governor Dr Dalitso Kabambe said MPC) met on 25th and 26th September 2018, to review the global and domestic economic developments and resolved to keep the policy rate unchanged at 16.0 percent and Liquidity Reserve Requirement (LRR) at 7.5 percent.

Kabambe, who also chairs the MPC,  said the Committee noted that risks to the inflation outlook still persist on account of further increases in administered prices, higher food and global oil prices and  increased public sector financing requirements.

He said Inflation in the remainder of 2018 is projected to remain above the medium term objective on account of these perceived risks.

“The MPC therefore considered that maintaining the Policy rate at 16.0 percent will ensure that the policy stance remains adequately tight to manage these risks and ensure that inflation declines gradually towards the medium-term inflation objective of 5.0 percent,” he said.

He added that headline inflation is still in single digit but and averaged 9.1 percent during the second quarter of 2018, 0.5 percentage points higher than what was reported during the first quarter of 2018.

“During the third quarter inflation is expected to pick up to 9.3 percent on account of materialized upside risks that were foreseen during the second MPC of 2018. ”

He said the impact of these risks has, however, been subdued by the tight stance of monetary policy.

“Inflation edged up to 9.3 percent in August 2018 from 8.6 percent in June 2018. In the short term, inflation is expected to remain slightly elevated, albeit transitory, on account of seasonal factors, utility tariff shocks, pump fuel price pressures as well as rising public sector financing requirements.

“This notwithstanding, average inflation for 2018 and 2019 is projected at 9.3 percent and 9.6 percent, respectively.”

Kabambe said Global and Domestic Output Developments Prospects for global economy remain robust with output expected to grow by 3.9 percent in 2018 and 2019. Advanced economies’ growth is expected to remain at 2.4 percent in 2018 before slowing down to 2.2 percent in 2019.

“Recovery in the Sub-Saharan Africa is set to continue, supported by the rise in commodity prices. Global oil prices have moderated slightly, but remain elevated. Turning to the domestic front, the economy is expected to grow by 4.0 percent in 2018, 1.2 percentage points lower than 5.2 percent growth registered in 2017, on account of weak agricultural performance.

“The unsatisfactory agricultural performance has affected availability of maize and other food items which is likely to exert upward pressure on food prices.”

On exchange rate, Kabambe said it continues to be stable supported by adequate foreign exchange reserves coupled with tight liquidity conditions.

He said gross official reserves remained above the targeted 3 months of import cover, saying as at end of August 2018, the gross official reserves were at 3.6 months of imports.

“The stable exchange rate is expected to anchor inflation expectations in the short to medium term. Maintaining policy rate at 16.0 percent is expected to reduce the impact of upside risks and inflation is projected to remain elevated in the coming months before falling back gradually.

The Committee decided that maintaining the current policy stance will help in containing  pressures and directing inflation towards the medium term objective of 5 percent.

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