Reserve Bank of Malawi reduces policy rate to 14.5%

By Duncan Mlanjira

Reserve Bank of Malawi (RBM) has reduced the rate at which commercial banks borrow from the central bank as lender of the last resort by by 150 basis points from 16% to 14.5%.

Addressing a press conference on Wednesday at their offices in Blantyre soon after a Monetary Policy Committee meeting, RBM Governor Dalitso Kabambe also announced that the central bank has also reduced the Lombard rate from 200 basis points to 40 basis points above the policy rate and has cut the Liquidity Reserve Requirement (LRR) on foreign currency deposits by 375 basis points from 7.5% to 3.75 while the LRR on local currency deposits has been reduced by 250 basis points from 7.5% to 5.0 percent. 

Kabambe (2nd right) addressing the press conference

“In arriving at this decision, the MPC observed that risks to inflation experienced in 2018 are dissipating and that the macroeconomic outlook for 2019 is favourable.

“Monetary policy decisions are based on a Forecasting and Policy Analysis System (FPAS) which is an information-intensive forward-looking framework for structured and evidence based monetary policy decision making. At the core of this framework, is a Quarterly Projection Model (QPM) which describes dynamics of demand, supply and exchange rate.

“Monetary policy setting is endogenous and is aimed at minimising the deviation of aggregate demand, aggregate supply as well as the exchange rate from their equilibrium positions. In setting the monetary policy stance, emphasis is placed on closing the gaps between the Reserve Bank of Malawi’s projected inflation and the target. 

“While greater emphasis in this framework is on pre-empting risks to macroeconomic outlook, a careful balance is applied to ensure that historical as well as current developments also feed into the policy process. The approach of the MPC is to look through the first-round effects and focus on the possible second-round effects of supply side shocks. 

Kabambe launches RBM’s strategic plan

“The current monetary policy decisions must therefore be viewed in the context of monetary policy reforms happening at the Reserve Bank of Malawi.”

He reported that risks to inflation have reduced for 2019 while 2018 was characterised by several shocks to inflation. 

“These shocks, which were envisaged by the MPC, necessitated maintaining a relatively tight policy stance in 2018. The shocks included, electricity tariffs which were increased by around 50% and fuel prices which were increased by around 19%. 

“Maize price rose by over 60% compared to 2017 levels owing to dry spells and fall army worm attacks experienced in some parts of the country. Inflation therefore mostly increased in the year, rising from 8.6% in 2018 to 9.9 in 2018.

“Contrary to developments in 2018, risks to inflation are projected to subside in 2019. The favourable weather conditions experienced so far point to higher agricultural output than earlier projected. This is expected to significantly reduce food inflation. 

Maize price rose by over 60% in 2018 compared to 2017 levels

“Furthermore, adequate foreign exchange reserves and favourable international crude oil price developments point to significantly reduced non-food inflation pressures. As a result, baseline inflation projections from the Reserve Bank of Malawi’s Quarterly Projection model have shifted downwards.

“Inflation is now projected to average 8.5% in 2019, from an earlier projection of 10.1%. Though inflation expectations remain relatively high, they are likely to moderate on account of earlier than expected December 2018 downturn in inflation as well as favourable prospects for macroeconomic outturn.”

He added that global and domestic oil prices are now stable as brent crude oil prices which rose to as high as US$86 per barrel in October 2018 significantly fell to about US$50 per barrel in December 2018. 

“Forecasts suggest that crude oil prices will average around US$68.76 a barrel in 2019. Pummeled by concerns over the outlook for global demand, simmering trade tensions, increasing supply and rising inventories, crude oil prices are projected to remain relatively stable in the near term. 

“These prospects necessitated the revision of this assumption in the Reserve Bank of Malawi’s Quarterly Projection Model (QPM) which contributed to an overall downward shift in the baseline inflation forecasts. 

“The stable international crude oil prices, together with the projected exchange rate stability point to relatively stable domestic pump fuel prices in 2019 and hence, subdued pressure on non-food inflation,” Kabambe said.