Policy rate direction draws mixed reactions

In the wake of observations that a tight monetary policy stance has failed to tame inflation, economists have urged the Reserve Bank of Malawi (RBM) to exercise caution when determining the policy rate.

The calls come ahead of the first RBM Monetary Policy Committee (MPC) meeting this year in Lilongwe to decide on the direction of the policy rate, liquidity reserve requirement and also report on the performance of the economy.

RBM spokespersperson Mark Lungu confirmed on Tuesday that the meeting was scheduled to start yesterday and end today.

The MPC meeting, the first since the RBM devalued the kwacha by 44 percent last November comes at a time inflation is at a 10-year high of 34.6 percent, which is 10 percentage points above the policy rate at 24 percent.

In an e-mailed response on Tuesday, the Economics Association of Malawi (Ecama) said in view of the current trends, the MPC is more inclined towards stabilising prices.

Reads the Ecama statement: “We would expect the MPC to continue tightening monetary policy.

“However, considering that the current policy rate is already high at 24 percent, which is the highest in the past six years, the MPC may maintain the current policy rate.”

Ecama said it would not be fair to argue that the effectiveness of monetary policy has been affected by rising food inflation because food prices are influenced by diverse factors such as cost of inputs.

Speaking in an interview on Tuesday, economic analyst and researcher Exley Silumbu urged the central government to respect the independence of the central bank to avoid regressing into fiscal dominance, a situation where a central bank bows to pressure from the central government when implementing monetary policy.

He said: “The central government must implement fiscal policy. Ideally, fiscal and monetary policies should be aligned, but we should not do it at the expense of the independence of the central bank.”

Economic analyst Dalitso Kubalasa, a former executive director of the Malawi Economic Justice Network, said he expects the MPC to take a cautious approach and lean towards adjusting the policy rate.

He said: “Such a move could offer some relief, steadying the ship and, most importantly, reassuring citizens amidst uncertainties.

“Importantly also, a well-communicated decision might help anchor public confidence, fostering stability in both the currency and economic expectations going forward.”

Market analyst Bond Mtembezeka said he expects the MPC to adopt a “wait and see” approach and maintain the policy rate because the exchange rate has stabilised and food prices should go down as we approach the harvest period.

He said it is an uphill task to combat inflation driven by maize prices with monetary policy tools such as interest rates.

“The solution lies on the supply side. If we can boost food production sustainably then we can deal away with food inflation,” said Mtembezeka.

Catholic University economics lecturer Greenson Nyirenda said raising the policy rate has not worked for Malawi, as such, the central bank should transition to a policy that addresses foreign exchange imbalances in the country.

But Secretary to the Treasury Betchani Tchereni, a former member of the MPC, urged the committee to maintain the policy rate because raising the interest rates has not helped to rein in inflation.

He said: “The real problem with our economic analyses is the discrepancy between economic theory and economy on the ground.

“The situation is different here. Headline inflation in Malawi is largely driven by food inflation, not raising the policy rate.”

Tchereni said if the country can boost production and ensure that food is readily available, the country can bring down food inflation.

In its July 2023 issue of the World Economic Monitor, the World Bank, while acknowledging that the policy rate was high, recommended that the government should maintain a positive real interest rate, meaning that the policy rate should be higher than the inflation rate.

The RBM last raised the policy rate in July 2023, the spread between inflation and the policy rate was 6.4 percentage points, with inflation hovering at 28.4 percent while the policy rate was at 22 percent.