Money supply on the rise,threatens inflation outlook

 Money supply (M2) continues to rise, increasing by K343.8 billion to K4 trillion in the first quarter of this year, a development analysts say could threaten the country’s inflation outlook.

In the previous quarter, Reserve Bank of Malawi (RBM) data shows that M2, the total amount of cash and cash equivalents circulating in an economy at a given point, increased by K384.4 billion or 11.7 percent, in the previous quarter.

In an interview yesterday, market analyst Cosmas Chigwe observed that with inflation still high, it is likely that the central bank will have to adjust its monetary policy stance to manage the increased liquidity and control potential inflation.

He said: “With more money circulating, there is a higher likelihood of increased spending, which can lead to demand-pull inflation if the supply of goods and services does not keep up with the rising demand.

“On the other hand, the significant increases in demand deposits and term deposits indicate higher savings and liquidity in the banking system which can boost investment.”

Chigwe said despite being inflationary, an increase in available capital could spur economic activities, promoting growth and potentially leading to job creation and higher gross domestic product.

He advised investors in the money market to assess the risks associated with inflation and interest rate changes, observing that a high growth rate in M2 usually signals future volatility, influencing the demand for short-term versus long-term investments.

“The rise in foreign currency denominated deposits can affect the exchange rate dynamics. If these deposits are the result of increased foreign investments or remittances, it could strengthen the local currency,” said Chigwe.

According to RBM, the annual growth rate of M2 increased to 47.8 percent in the first quarter of 2024 from 32.2 percent the previous quarter and compared to 31.6 percent in the first quarter of 2023.

In an interview, RBM spokesperson Mark Lungu observed that growth in money supply above nominal gross domestic product growth “is always a concern”.

He said: “However, we have seen the Monetary Policy Committee quickly reacting to that by adjusting the Liquidity Reserve Requirement [LRR] ratio upwards which should be able to withdraw a substantial amount of liquidity in the system.

“The position will be reviewed at the next Monetary Policy Committee (MPC) meeting.”

The Second MPC of 2024 kept the policy rate at 26 percent, maintained the LRR ratio for foreign currency deposits at 3.75 percent, but raised the LRR ratio for domestic currency deposits by 100 basis points to 8.75 percent