Reserve Bank of Malawi Raises Policy Rate by 2% as Inflation Surge in November

LILONGWE, Malawi, Capital Markets in Africa — Reserve Bank of Malawi Monetary Policy Committee (MPC) met on 4th November 2015 and examined the external and domestic economic developments and decided to raise the Policy rate to 27 percent from 25 percent in order to contain second round effects of rising inflation, according to statement signed by the Reserve Bank of Malawi governor Mr Charles S.R. Chuka.

The Liquidity Reserve Requirement (LRR) at 7.5 percent having adjusted downwards to 7.5 percent in order to enable banks lower the spread between the prime lending rate and the Policy Rate (PR), in the previous MPC meeting.

The government had revised 2015 real GDP growth to 3.0 percent from an earlier projection of 5.4 percent. The downward revision was necessitated mainly by a contraction in agriculture due to late on-set of rains, floods and early cessation of the rains, according to the Bank press release.

Furthermore, annual growth in money supply during the first 9 months of 2015 averaged 18.2 percent, which was below the estimated nominal GDP growth rate for 2015 of 21.1 percent. However, money supply growth accelerated to 30.7 percent from 13.8 percent in June 2015, implying rising demand pressures, the reserve bank stated.

Inflationary pressures continued in September 2015 as headline inflation reached 24.1 percent, from 23.0 percent in the previous month. The pressures rose mainly from non-food inflation, which picked up by 1.4 percentage points reflecting continued depreciation of the kwacha and second round effects from increases in food prices. Food inflation also increased, albeit marginally by 0.5 percentage points due to the after effects of the decline in agricultural production for the 2014/15 season.

In spite of a relatively healthy foreign reserves position compared to last year and continued inflows from the tobacco auction floor, the kwacha depreciated sharply during the months of July and August due to excess demand, speculative behaviour by market agents, and an appreciating dollar. In the event, gross official reserves declined from US$737.1 million in July to US$664.4 million in September 2015 following interventions in the market to smoothen exchange rate movements.

The banking system liquidity increased from 4.7 billion kwacha in June to 17.4 billion kwacha in October 2015. Subsequently, the interbank rate which was at 25.3 percent in June dropped to 11.2 percent in October 2015. Average Treasury bill yields declined over the same period due to increased liquidity in the market.