The Reserve Bank of Malawi (RBM) says monetary policy, a key driver of interest rates on loans, will remain tightened until a sustained declining trend in inflation is achieved.
The central bank’s stance comes in the wake of calls to adopt a looser monetary policy to strive for increases in private consumption and support real gross domestic product through credit expansion which supports private consumption and investments.
However, in its recent market intelligence report, the central bank says its current monetary policy stance is being taken considering that low and stable inflation is necessary for attainment of sustained high economic growth that leads to welfare improvements.
Said the bank in the report: “On the domestic front, although inflation slowed in June 2023, it is too early to conclude that such is the beginning of a downward trajectory for inflation.
“The observed deceleration could be a basal effect arising from the high prices of June 2022 following the reaction to the May 2022 exchange rate realignment. It is therefore prudent for monetary policy to remain tightened until a sustained declining trend in inflation is achieved.”
RBM data shows that in the second quarter (April to June 2023), headline inflation surged to an average of 28.4 percent, from 26.5 percent in the last quarter and compared to 19.4 percent in the same quarter the previous year.
The central bank now projects annual inflation to average higher at 29.5 percent in 2023 than 24.5 percent forecasted during the previous monetary policy committee (MPC) meeting and compared to an average of 20.9 percent in 2022.
As a consequence of the inflation outlook, MPC decided to increase the policy rate by 200 basis points to 24 percent from 2022 percent.
The policy rate was static at 12 percent since 2021 and the central bank indicated that it was meant to support economic recovery from the Covid-19 pandemic.
However, in view of rising inflation, the central bank has since the last-quarter of 2022, sustained an adjustment in the policy rate to tame the rising inflation.
Earlier, the Economist Intelligence Unit (EIU) urged RBM to consider no further adjustments in monetary policy despite intensifying inflationary pressures.