The Reserve Bank of Malawi (RBM) says the Russia-Ukraine war has jeopardised itsprospects of the central bank supporting economic recovery, forcing it to revisit the monetary policy stance.
In its February 2022 RBM Market Intelligence Report published on Wednesday, the central bank said the materialisation of an unanticipated risk of the war has prospects of a quick return to low inflation across all global economies dampened.
The central bank said unless there are interventions to reverse the soaring prices for energy, fertiliser, wheat and other related commodity prices, heightened inflation pressures could persist in 2022.
Reads the report in part: “Under these circumstances, accommodative monetary policy may not yield the desired results of supporting economic recovery, given that rising inflation, coupled with a weakened currency, implies that the cost of production also increases.
“Locally, the decision on whether or not to recalibrate the stance of monetary policy shall be firmed up and communicated on the last day of the Second 2022 Monetary Policy Committee [MPC] meeting, on April 29 2022.”
The monetary policy, which guides the management of money supply and interest rates to meet macroeconomic objectives, is for now meant to entrench the recovery of the domestic economy from the Covid-19 pandemic and stimulate further growth, according to the central bank.
RBM fears that to net-importing countries, including Malawi, the deteriorating terms of trade emanating from the exogenous global shocks could exert further depreciation pressures to the local currency, thereby fueLling inflation.
During the month under review, the kwacha strengthened, albeit marginally, by 0.3 percent against the US dollar and closed the month at K822.0984 per dollar.
Inflation rate, on the other hand, increased to 13 percent from 12.1 percent in the previous month.
Food inflation rose to 15.3 percent from 14.2 percent in January 2022, largely on account of seasonal factors. Similarly, non-food inflation rose to 10.1 percent from the preceding month’s position of 9.6 percent due to sustained increases in costs of imported commodities.
During the last MPC meeting held in February, RBM maintained the policy rate at 12 percent, relatively stabilising lending rates in commercial banks at the current average 12 percent.
However, RBM revised its projection for annual average headline inflation rate for 2021 from 8.4 percent during the fourth MPC meeting to 10.4 percent during the first MPC meeting, reflecting the impact of hikes in commodity prices.
The policy rate has been declining since November 2016 and was stable at 13.5 percent for the most part of 2020 before being revised downwards to 12 percent in November 2020.
Last month, the Economist Intelligence Unit (EIU) said the raging war between Ukraine and Russia could threaten Malawi’s monetary policy.
EIU said the next interest rate decision by RBM, at the end 2022, is expected to be upward, with further small rate increases over 2023 and 2026 as inflationary pressures build on the back of improved consumer sentiment.
In an interview yesterday, Economics Association of Malawi executive director Frank Chikuta said Given recent developments, contractionary monetary policy may be appropriate rein in inflation.
He said: “RBM’s decision to revisit the monetary policy stance is timely and welcome.
“This is because, apart from increasing the cost of production; hence, affecting competitiveness, high inflation also erodes purchasing power and increases the cost of living, pushing more people into poverty.”