Reserve Bank of Malawi slashes policy rate to 22 percent

LILONGWE (Capital Markets in Africa) – The Monetary Policy Committee (MPC) of the Reserve Bank of Malawi on Friday 24^th March 2017, agreed to cut the indicative cost of money, technically known as the policy rate, by 200 basis points from 24 percent to 22 percent, a development buoyed by a sharp fall in inflation.

It is the second time in five months that the monetary authorities have slashed the policy rate following a 300 basis point cut, from 27 to 24 percent, in November 2016.

In a statement released on Friday, MPC Chairperson and RBM Governor Charles Chuka said the committee also agreed to maintain the amount of money commercial banks maintain with the central bank without earning interest, technically known as the liquidity reserve ratio, at 7.5 percent.

“The MPC observed that inflation has been declining since August 2016. Headline inflation fell to 16.1 percent in February 2017 from 37.9 percent in February 2013 and [sic] compared with 23.4 percent in February 2016.

The sustained deceleration in nonfood inflation, from a peak of 42.8 percent in March 2013 to 14.6 percent in February 2017, reflected a consistent tight monetary policy stance. “Concurrently, inflation developments benefited from the drop in food inflation from 38.2 percent in February 2013 to 17.5 percent in February 2017, driven by timely response to the recent humanitarian crisis and the improved outlook for food supply in 2017,” Chuka said.

He said, following the sharp drop in inflation, RBM has adjusted its inflation projection from 16.1 percent to 14.2 percent by June 2017, reflecting seasonal improvement in food supply, stability of the exchange rate and low international oil prices.

“The outlook for inflation in the second half of the year will depend on fiscal outturn for 2016/17 and developments in the foreign exchange market. The Reserve Bank of Malawi has continued to implement a tight monetary policy stance, resulting in money supply growth slowing down from 30 percent in June 2016 to 15 percent in December 2016,” Chuka said.

He further indicates that the development kept monetary expansion in line with nominal GDP growth of about 19 percent in 2016, an indication that inflationary pressures were under control.

According to MPC, economic growth is projected to rebound to between 4 and 5 percent in 2017 from 2.7 percent in 2016, on the back of favorable weather conditions and stable macroeconomic environment. However, the MPC indicated that sustained macroeconomic stability and efforts aimed to address underlying structural constraints were key to continued medium to long-term economic recovery.