The Reserve Bank of Malawi (RBM) has warned that it may be compelled to tighten the monetary policy further as commodity prices continue to soar with expectations that the prices would remain high in the near-term.

A tight monetary policy, actions by a central bank by reducing money supply and increasing the policy rate—a key driver of interest rates on loans—, could trigger a rise in interest rates.

In its September 2022 RBM Market Intelligence Report issued on Wednesday, the central bank indicated that inflation which remains high locally and across the globe may push the central bank to tighten the policy stance.

According to the bank the decision to tightening stance of monetary policy will be done in order to curb the rising inflation, anchor inflation expectations and pre-empt any second-round effects of the supply-side pressure to inflation

Reads the report in part: “Inflation will keep rising as the supply-demand imbalances are yet to normalise. With prices expected to remain high in the near-term, further monetary policy tightening should be expected.”

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, the central bank during the second MPC meeting in May this year hiked the policy rate to 14 percent.

During the fourth MPC meeting held last week, RBM also adjusted the policy rate, by four percentage points to 18 percent from 14 percent amidst the rising inflation currently at 25.9 percent as of September.

RBM governor Wilson Banda, indicated in arriving at the decision, the committee noted that high inflation 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 has since observed that rising inflation is indeed a cause for concern and a situation which calls for a reflection on policy issues.

He said: “As is often the case, this tends to force central banks all over the world to increase interest rates. The monetary policy committee may indeed decide to increase the policy rate which under such instances tends to go up to tame the rising inflation.”

Catholic University of Malawi economics lecturer Hopkins Kawaye also indicated that the RBM will be expected to adopt a tight monetary policy to ensure price stability given the rising inflation. Meanwhile, the International Monetary Fund (IMF) has asked authorities to ensure that the monetary policy framework centres on containing direct and second-round food price inflationary pressures as well controlling overall inflation.

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