Firm doubts RBM inflation target

Nico Asset Managers, an investment advisory firm, has doubted optimism

by the Reserve Bank of Malawi (RBM) over the expected ease in inflation rate in the short to medium -term.

But RBM argues that the  rate at which prices of goods and services change in an economy will remain within the single-digit lane this year as earlier projected.

The central bank is keeping its fingers crossed to have the 2019 annual inflation close at nine percent, which represents a one percentage point above an earlier projection of eight percent on account of elevated maize prices.

RBM forecasts also indicate a continued decline in inflation rate to around five percent in the medium to long-term.

But in its July 2019 Economic Report, Nico Asset Managers has expressed reservations on the projected inflation figures, arguing that there is likelihood that inflation will be under pressure in the short-term.

Reads the report in part: “Despite the optimism of the monetary authorities of the extent to which the rise in maize prices would have on the overall inflation, the likelihood of these prices impacting the inflation is high.”

Headline inflation, which has been in single digit lane since August 2017, apart from November 2018 when it reached 10.1 percent, is at 9.3 percent as of July 2019, an increase from nine percent in June, according to the National Statistical Office (NSO).

In the short to medium- term, Nico Asset Managers, forecast that maize prices are expected to push the food inflation upwards if no measures are introduced to manage the prevailing soaring maize prices, especially as the economy enters a lean period.

“These estimates are based upon higher agricultural output and controlled government spending. However, adverse weather, pest-related disruptions to crop production and a sharper than expected depreciation of the kwacha, pose major upside risks and may cause the inflation rate to edge up,” says the firm.

Prices for maize, which has more weight in the Consumer Price Index (CPI), a basket used to compute inflation figures by NSO, have significantly risen on the market; hence, posing an upward pressure on the food inflation and in turn on the headline inflation.

Centre for Social Concern (CfSC) figures show that a 50 kilogramme bag of maize, which was at K8 000 in June is now selling at an average of K12 000 in most parts of the country.

But reacting to Nico Asset Managers, RBM spokesperson Mbane Ngwira argued that RBM’s projection are based on price modeling in projecting inflation figures.

He is optimistic that annual average inflation this year will remain in single digit lane, adding that the central bank expects the inflation rate to converge at around five percent in the first quarter of 2021.

“Even with enough maize, we noted that maize prices have continued to increase because of several factors, including speculations and if that maize is still in the economy, towards the end of the year that maize will still come on the market and will dampen prices,” said Ngwira.

Backing RBM stance, Economics Association of Malawi (Ecama) executive director Maleka Thula said on Tuesday that going forward, they expect food prices, especially maize, to stabilise which will likely ease pressure on overall inflation. “I feel projections by RBM on inflation are still attainable given that the bank has just revised upwards inflation projections from eight to nine percent,” he said.