Policy to focus on taming prices—RBM

The Reserve Bank of Malawi (RBM) says monetary policy stance in the first half of 2021 will focus on maintaining inflation rate in single digit and anchoring inflation expectations to cement the economy’s recovery from Covid-19.

In its bi-annual Monetary Policy Report issued on Friday, the central bank said monetary policy—the central bank’s action to manage money supply to reduce inflation and interest rate to ensure price stability—will aim at supporting the accumulation of international reserves to at least three months of import cover and providing room for sufficient credit to the private sector.

In order to achieve these objectives, the RBM said it will continue to pursue a forward-looking monetary policy framework, with the short-term nominal interest rate, particularly the interbank rate (IBR), as an operational target.

Reads the report in part: “The IBR is currently set to be within +0.2 and -4.0 percentage points around the policy rate [at 12 percent].

“While the RBM will continue to use the policy rate as a signal of its monetary policy stance, open market operations will be employed to align the IBR to the policy rate.”

In terms of the policy rate setting, the RBM said it will continue to be guided by the outlook of key macroeconomic variables, particularly inflation rate currently at 9.4 percent as of March 2021 and real gross domestic product growth rate projected at 3.5 percent.

In its commentary issued in February, Economists Intelligence Unit urged authorities to maintain accommodative monetary policy stance throughout 2021 to hold the rate at 12 percent to support a domestic recovery.

Reads the EIU report: “Given that inflation remains above the RBM’s target and that the exchange rate has been depreciating with little scope for further easing, even if domestic demand remains weak.

“The RBM is then expected to adopt a tightening stance from 2022-25 as inflationary pressures build on the back of rising global oil prices and improved consumer sentiment.”

At the first Monetary Policy Committee meeting in January this year, RBM maintained the policy rate at 12 percent, liquidity reserve requirement ratio on domestic and foreign deposits at 3.75 percent and the Lombard rate at 20 basis points above the policy rate.

RBM Governor Wilson Banda said the decision was meant to allow the impact of the last policy rate reduction to transmit through the economy and support economic recovery.

In an interview yesterday, economics professor at University of Malawi’s Chancellor College Ben Kaluwa said the stance to tame inflation should translate to a decline in the policy rate.

“This should compel authorities to lower the policy rate because this is the only way the country will recover from slowdown in business brought about by the Covid-19 pandemic,” he said.

The policy rate has been maintained at 12 percent since last year.