Reserve Bank of Malawi (RBM) says it is too early to adjust the monetary policy to an accommodative stance in view of decelerating inflation rate reported last month. 

Inflation, which has been on the rise in the 10 months to October this year, decelerated by 0.9 percentage points to 25.8 percent in November 2022 from 26.7 percent in the preceding month.

RBM headquarters in Lilongwe

Both food and non-food prices contributed to this outturn where food inflation eased to 33.4 percent from 34.5 percent in October 2022 while non-food inflation moderated to 17.7 percent from 18.6 percent during the same period. 

But in its November 2022 RBM Market Intelligence Report, the central bank indicated that inflation rate remains high locally and across the globe and that the current level of inflation is substantially in excess of the target it set therefore it could not loosen the monetary policy.   

The central bank said the mixed performance in global commodity prices is a signal that the moderation in inflation pressures observed recently could be short-lived.

Reads the report in part: “The central bank will take a cautious approach as ignoring these fundamentals may cost monetary policy by prolonging the period of high and double digit inflation, which is not conducive for promoting the attainment of high and sustainable economic growth.”

The policy rate has been static at 12 percent since 2021, a move the central bank indicated was meant to support economic recovery from the Covid-19 pandemic.

However, in view of rising inflation rate, the central bank hiked the policy rate to 14 percent during the second MPC meeting in May this year.

During the fourth Monetary Policy Committee (MPC) Meeting in October, RBM also adjusted the policy rate by four percentage points to 18 percent from 14 percent amid the rising inflation rate currently 25.8 percent as of November.

RBM Governor Wilson Banda said in arriving at the decision, the committee noted that high inflation rate could frustrate the country’s economic recovery process while also eroding purchasing power of households.

He said: “In the absence of measures to contain inflation, rising prices will continue to diminish the welfare of households.

“The MPC, therefore, considered expeditious tightening of monetary policy stance as further delays could risk entrenching inflation expectations.”

Economic statistician Alick Nyasulu in an interview on Saturday observed that the traditional monetary policy approach which the RBM follows where  when inflation goes up they raise interest rates does not work for the Malawi economy.

He said: “The current approach works in advanced economies and not for us. It is a futile exercise that only succeeds to raise the cost of finance by the few businesses that access formal means of financing.

“The average household in this country borrows from informal channels and all monetary policy tricks of interest rate adjustments in my view are unlikely to have any impact on reducing inflation. It is textbook economics whose efficacy in our set up is questionable.” 

Meanwhile, commercial banks this month adjusted upwards reference rate, an interest rate benchmark used to set other interest rates, to 17.3 percent from 16.6 percent last month.

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