Reserve Bank of Malawi maintains policy rate at 13.5%, ‘no risk to medium-term inflation outlook’ 

The Reserve Bank of Malawi (RBM) has  resolved to maintain the policy rate—also known as the bank rate—at 13.5  percent in view of medium-term inflation outlook.

RBM Governor, Dalitso Kabambe, announced this on Thursday after a two-day meeting of the Monetary Policy Committee (MPC). The adopted policy stance is deemed adequately tight to deal with emerging risks while also aiding the growth momentum.

Kabambe, who also chairs the MPC,  said in arriving at this decision, the committee observed that although rising maize prices are likely to continue pushing up headline inflation in the first quarter of 2020, this elevation is deemed temporary and does not pose a risk to the medium-term inflation outlook

Hesaid annual headline inflation for 2019 averaged 9.4 percent, marginally higher higher that the 9.2 percent recorded in 2018 and RBM’s projections.

Kabambe said the rise in inflation is due to rising food prices but it was also cushioned because non-food prices remained muted.

“Food inflation remained in double digit throughout 2019 averaging at 14.3 percent compared to 9.8 percent in 2018.

“The rise in food inflation was mainly driven by increase in maize prizes while non-food inflation remained remarkably decreased, averaging 5.4 percent in 2019 from an average of 9.0 percent in 2018.”

Kabambe said the decrease in non-food inflation is on account of relatively tight monetary conditions as the Kwacha exchange rate has been broadly stable during the past three years, which was trading at an average of K738.8731 per US dollar in December 2019.

The Governor assured the public that the stability of the Kwacha is expected to continue in 2020 on the back of adequate foreign exchange reserves, which stood at 4.1 months of imports at the end of December 2019.

He said the Monetary Policy Committee also maintained the Liquidity Reserve Requirement (LRR) on the local currency deposits at 5 percent and the LRR on foreign currency deposits at 3.75 percent.

“In arriving at the decision, the Committee observed that although rising maize prices are likely to continue pushing up headline inflation in the first quarter of 2020, the elevation is deemed temporary and does not pose significant risks to the medium-term inflation outlook,” the Governor said.

On Real GDP, the Committee estimates it to have grown by 5.0 percent in 2019 from 4.0 percent in 2018 because it has largely been driven by recovery in the agriculture sector and the same recovery, together with favorable macroeconomic conditions, the Real GDP growth is projected between 5.0 and 6.0 percent in 2020.

Kabambe said oil prices are expected to average US$58.0 per barrel in 2020, lower than US$60.2 per barrel in 2019 and that the oil prices are projected to decrease further to US$55.3 in 2021.

Although the inflation is projected to average 8.8 percent in 2020 — premised on favourable weather conditions and continued exchange rate stability, RBM remains committed to a 5.0 percent (plus or minus 2) inflation objective in the medium term.

The private sector credit grew by 21.3 percent in 2019 compared to 11.5 percent in 2018 and Kabambe this was due to the confidence the sector has following reduction in interest rate.

“Apart from the traditional borrowers, notable expansions were observed in energy and and mining sectors,” he said.

In summing up, Kabambe said though the country was country was affected by weather shocks such as the Cyclone Idai that hit the country in March last year, coupled with the rise in maize prizes, the economy is on the right track.

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