The Monetary Policy Committee (MPC) meeting of the Reserve Bank of Malawi (RBM) yesterday resolved to maintain the indicative price of money, technically known as policy rate, at 16 percent.
This is the second time MPC has kept the policy rate unchanged since slashing it by 200 basis points in December 2017.
The MPC decision has not come as a major surprise to many Malawians as it comes barely two months after inflation threatened to run away, rising to 9.9 percent in March before crawling back to 8.9 percent in May.
The committee also agreed to maintain the Liquidity Reserve Requirement (LRR) at 7.5 percent and the Lombard rate at 200 basis points above the policy rate.
MPC Chairman, Dalitso Kabambe, told reporters in Lilongwe that, the committee observed that despite a recent reduction in inflation to 8.9 percent in May 2018, risks to inflation outlook persist.
Kabambe said the decision of the committee is aimed at managing risks to the inflation outlook and support disinflation towards the medium-term objective of five percent.
“The committee observed that inflation during the first half of 2018 remained somewhat elevated due to rebasing effects of the Consumer Price Index (CPI), electricity tariff adjustment in May 2018, a jump in maize prices in January and February 2018 on account of speculation, and fiscal pressures.
“Going forward, these risks coupled with rising global oil market prices are expected to persist in the near-term. The committee, therefore, opined that maintaining the current monetary policy stance will help in containing the risks and directing inflation towards the medium-term objective of five percent. This policy stance will be complemented by consistent mop-up operations to maintain tight liquidity conditions in the market,” Kabambe said.
The decision by MPC to keep the cost of money unchanged comes barely less than a month after the United Kingdom-based economic think tank, the Economist Intelligence Unit, had predicted that the authorities would be forced to hike the policy rate due to mounting inflationary pressures.
In its Second Quarter Country Report for Malawi, EIU argued that inflation, recorded at 8.9 percent in May, would increase to an average of 12.4 percent in 2018 on the back of a 25 percent electricity tariff hike, higher oil prices and a tightening of local food supplies as a result of a sharp decline in maize output.
According to Kabambe, the exchange rate continues to be stable, trading at around K734 against the United States dollar. The stability occurs on the back of a build-up in international reserves.
“International reserves edged up to $760.2 million, equivalent to 3.6 months of imports as at 3rd July 2018 from $682.9 million (3.2 months of imports) recorded in a same period in 2017. This accumulation of reserves reflects purchases from the market.
“Meanwhile, the foreign exchange market has remained liquid during the period. Going forward, the foreign exchange market is expected to remain liquid; hence, support stability in the exchange rate,” Kabambe said.