The Reserve Bank of Malawi (RBM) is implementing a tight monetary policy stance, but an investment advisory firm report says despite this, inflation will keep trending upwards in the short to medium term.
RBM Governor Charles Chuka last week also acknowledged that unrelenting pressure on inflation, currently hovering at 28.3 percent as of September, is one key challenge for monetary authorities despite a slowdown in money in circulation.
In its monthly economic review for October 2012, Nico Asset Managers Limited has observed that inflation is forecast to increase due to continued depreciation of the kwacha which will lead to increases in the cost of fuel and other commodities.
â€œDespite the tight monetary policy stance, inflation is still expected to remain in double digits in the medium term,â€ said the firm, adding that inflation is expected to moderate after the maize harvest in 2013.
Maize, as part of the food component weighs in heavily at 58.1 percent in the Consumer Price Index (CPI)â€”a measure that examines the weighted average of prices of a basket of consumer goods and services.
Food inflation, according to Nico Asset Managers, is expected to increase as the lean season up to March-April next year continues.
Chuka noted that containing money supply (M2) growth at current levels will depend on successful rollover of domestic debt.
But he said although inflationary pressure remains a challenge, Gross Domestic Product (GDP) growth rate appears to be positive in the near future despite growth this year projected at 1.6 percent from an initial 4.3 percent.
Economists agree that inflation is a monster that will continue to erode the purchasing power of money resulting in lower disposable incomes and reduced savings.
A reduction in savings could eventually reduce funds available for capital investments for firms resulting in low private sector activity and slow economic growth as is expected this year.
The Nico Asset Managers monthly report has commented on a number of economic developments.
It said the kwacha continued to weaken against all the major currencies in October except the South African rand.
The local unit recorded a depreciation of 5.2 percent against the US dollar to K314.47 from K298.97, 4.5 percent against the pound sterling to K507.22 from K485.38, 9.9 percent weakening against the euro to K407.56 from K386.06 and 0.2 percent appreciation against the rand from K36.32 to K36.26. â€œSince authorities adopted a floating exchange rate system [on May 7 2012], the kwacha has been weakening against the major trading currencies except the South African rand,â€ said the firm.
A flexible exchange rate regime is a big challenge to businesses in terms of planning and a weakening currency increases liabilities for companies that have foreign currency liabilities on their balance sheet.
However, a positive attribute of a weak currency isÂ that it causes a reduction in foreign exchange demand as it becomes more expensive to acquire forex using the local currency.