Headline inflation for December 2017 has dropped by 0.6 percentage points from November’s 7.7 percent to 7.1 percent, with Reserve Bank of Malawi (RBM) projecting a five percent target for December 2018.
According to National Statistical Office (NSO) figures, the drop in inflation has put the annual headline inflation rate for 2017 at 11.5 percent compared to the annual headline inflation of 21.7 percent in 2016.
The central bank has since said the downward trend of inflation which has been necessitated by stable exchange rate, stable fuel prices, tight monetary policy and a tight fiscal stance that has seen government spending within its budget will continue this year.
RBM spokesperson Mbane Ngwira, in an interview yesterday, said in cases where stable exchange rate, stable fuel prices and tight monetary policy obtain but government does not spend within its means all efforts are rendered ineffective.
He said: “This becomes so because the government keeps pumping in liquidity into the system that increases inflation but government has contained its spending. In 2018, we are projecting a five percent target achievable through a continued tight monetary policy, Treasury’s commitment to stay within budget, no agricultural shocks, no fuel prices shocks and no utility shocks.”
Over the past year and a half, Malawi’s annual rate of inflation, which was recorded at 20 percent in the same period in 2016, has been falling steadily, providing scope for monetary policy to loosen.
In view of this disinflation last year, RBM slashed the policy rate—the rate at which banks borrow from the central bank as lender of last resort—from 24 percent to 16 percent. The move necessitated banks to reduce their lending rates to an average of 25 percent. Economists have since advised authorities to stay the course of fiscal consolidation and do more work on strengthening the financial system’s stability, saying the downward inflation trend could improve growth prospects for the economy if sustained.
In an interview on Tuesday, economic commentator Gilbert Kachamba said expectations are that the drop will be reflected on the market with the general increase of prices being manageable.
“The availability of basics like maize should remain sustained to maintain the lower inflation. Our worry, however, remains on the non-food items,” he said.
IMF country representative Jack Ree is also on record as having said monetary policy should keep its focus on fighting inflation until a clean victory is announced.
In response to an e-mailed questionnaire yesterday, Ree said the trend of disinflation will give authorities more space to ease monetary policy over time, but cautioned that there is no reason to rush as there are many reasons for us to err on the cautious side in our journey to there.
“We have not yet won the war. Victory is very near, but the risk of inflation reversal is still real. The risks include the possible rebound of maize price, cost of electricity and public spending pressures,” he said.
According to Ree, the lower inflation will bring more growth as higher purchasing power boosts consumption. n