…Tough time for borrowers
LILONGWE-(MaraviPost)-The country’s central bank, Reserve Bank of Malawi (RBM) through the Monetary Policy Committee (MPC) has hiked Policy Rate by 200 basis points, to 24.0 percent.
This should cause for worry amongst borrowers as will need to pay more.
This is the second time for the MPC to increase the Policy Rate within four months, following a 400 basis points adjustment early this year.
As per tradition, commercial banks are also expected to adjust their lending rates upwards in line with the policy rate.
The MPC has also hiked the Liquidity Reserve Requirement (LRR) ratio on domestic deposits by 200 basis points to 7.75 percent.
MPC Chairperson and RBM Governor Wilson Banda said in a press statement made available on Friday morning, July 28, 2023, said that price pressures have intensified, such that inflation is projected to remain substantially above the medium-term target for longer.
The next MPC meeting is scheduled for October 25 and 26 and the decision will be announced on October 27, 2023.
President Lazarus Chakwera’s Tonse Alliance government has failed to control inflation, forex, drugs, fuel shortages, and high cost of living three years in power.
Below is RBM’s MPC statement:
RESERVE BANK OF MALAWI STATEMENT OF THE MONETARY POLICY COMMITTEE THIRD MEETING OF 2023
Monetary Policy Committee raises the Policy Rate to 24.0 Percent and the Liquidity Reserve Requirement Ratio on Domestic Currency Deposits to 7.75 percent.
The Monetary Policy Committee (MPC) met on 26th July 2023 to review the recent economic developments and decide on the monetary policy stance. The MPC decided to increase the Policy Rate by 200 basis points to 24.0 percent and
the Liquidity Reserve Requirement (LRR) ratio on domestic deposits by 200 basis points to 7.75 percent. Meanwhile, the Committee resolved to maintain the LRR ratio on foreign currency deposits at 3.75 percent and the Lombard rate at 20 basis points above the Policy rate. In arriving at this decision, the MPC noted that price pressures have intensified, such that inflation is projected to remain substantially above the medium-term target for longer.
Global Real Output Growth to Remain Subdued in 2023
The MPC observed that prospects for global economic activity, as reported in the IMF’s July 2023 World Economic Outlook (WEO) Update, are basically unchanged from forecasts in the April 2023 WEO. Despite an upward revision in
the 2023 global real output growth to 3.0 percent from 2.8 percent, this is still lower than the 3.4 percent registered in 2022.
The increase in interest rates by global central banks to curb inflation continues to weigh on economic activity.
Meanwhile, the 2024 global real output growth forecast remains at 3.0 percent, as projected in the April 2023 WEO.
The Committee noted that the resolution of the US debt ceiling standoff as well as strong action by the authorities to contain turbulence in the US and Swiss banking helped to subdue the immediate risks of financial sector turmoil.
On account of these developments, the 2023 real output growth for advanced economies has been revised upwards to 1.5 percent from 1.3 percent, whilst that of 2024 is unchanged at 1.4 percent.
In emerging markets and developing economies, growth is projected to be stable at 4.0 percent in 2023, as in 2022. Of the five regions under this group, three are expected to experience slower growth in 2023.
The most affected is emerging and developing Europe, whose growth is projected at 1.8 percent following the ongoing Russia-Ukraine war. Growth for the sub-Saharan African region is projected at 3.5 percent, virtually the same as 3.6 percent forecasted in the April 2023 WEO.
Global Inflation to Decelerate in 2023
The MPC further noted that the continued decrease in prices of global commodities has helped to ease inflation in most countries.
With central banks still determined to fight inflation through continued tight monetary policy, global
headline inflation could decline to an average of 6.8 percent in 2023 from 8.7 percent in 2022. The 2023 forecast represents a downward revision from 7.0 percent projected in the April 2023 WEO.
Domestic Real Economic Activity to Remain Weak
Regarding domestic economic activity, the Committee observed that the protracted limited supply of foreign exchange continued to affect the timely importation of intermediate goods for production.
This, coupled with the impact of adverse weather conditions experienced during the 2022/23 agricultural season, as well as the lingering effects of the Russia-Ukraine war, has weakened the initial prospects of a stronger growth of 2.7 percent in 2023 to 1.9 percent.
Merchandise Trade Deficit to Persist
Preliminary figures for 2023Q2 indicate that the merchandise trade balance registered a larger deficit of US$272.0 million than a deficit of US$165.5 million for 2023Q1, and compared to a deficit of US$252.2 million for 2022Q2. The
outturn was explained by the combined effect of an increase in imports of US$99.5 million and a decrease in exports of US$7.0 million during the period.
Exchange Rate Developments
The Malawi Kwacha TT exchange rate depreciated by 2.4 percent against the US Dollar to trade at K1,063.86 per US Dollar at the end of 2023Q2. The local currency also weakened by 4.8 percent against the British Pound and 2.3 percent against the Euro. However, against the South African Rand, the Kwacha gained 3.1 percent during the same period.
Meanwhile, the Bureaux US Dollar cash exchange rate closed 2023Q2 at K1,573.23 per US Dollar, representing a
quarterly depreciation of 5.5 percent.
Domestic Inflation
The MPC noted that inflationary pressures persisted during 2023Q2, as evidenced by a surge in headline inflation to an average of 28.4 percent, from 26.5 percent in 2023Q1 and compared to 19.4 percent in 2022Q2. The outturn was driven by an acceleration in food inflation, which rose to an average of 38.0 percent in 2023Q2, from 31.7 percent during 2023Q1, and compared to 25.4 percent for 2022Q2.
The rise in food inflation reflected the impact of the high costs of farm inputs, which has been sustained by the ongoing Russia-Ukraine war. The impact of unfavorable weather conditions experienced earlier this year has exacerbated
the situation.
Meanwhile, non-food inflation moderated to 17.6 percent in 2023Q2 from 20.4 percent in 2023Q1 but was higher than 14.0 percent for 2022Q2. The slowdown partly reflected the impact of tightening the monetary policy stance during the previous meeting, in addition to the continued weakening of global demand which has helped to suppress imported non-food inflation pressures.
Looking ahead, the MPC observed that inflationary pressures have strengthened, resulting in a more elevated inflation trajectory than anticipated during the previous MPC meeting. Upside pressures have emerged from both supply and
demand-side factors.
Regarding supply factors, pressures are evident in the rising food inflation during the harvest period in 2023Q2, contrary to seasonal trends.
Further, the cancellation of the UN-backed Black Sea Port Grain Deal by Russia is another source of upside risk, as this is expected to trigger imported food inflationary pressures.
Among the demand factors, pressures are likely to emanate from elevated public sector financing requirements as well as exchange rate developments. All these developments are driving market expectations and contributing to rising inflation.
The above factors have significantly shifted the inflation path upwards. Headline inflation is now projected to average higher at 29.5 percent in 2023 than 24.5 percent forecasted during the previous MPC meeting and compared to an average of 20.9 percent in 2022.
The MPC Decision
The MPC noted that the performance of the economy remained weak on account of adverse weather shocks; lingering effects of the Russia-Ukraine war; prolonged foreign exchange shortages and the associated exchange rate
depreciation; as well as fiscal deficits.
The Committee resolved that a monetary policy response is required to contain demand and reduce inflation towards the medium-term target. Therefore, the MPC decided to increase the policy rate by 200 basis points to 24.0 percent, and the LRR ratio on domestic deposits by 200 basis points to 7.75 percent.
Meanwhile, the Committee maintained the LRR ratio on foreign currency deposits at 3.75 percent and the Lombard rate at 20 basis points above the Policy rate.
The Committee arrived at this decision while being mindful that the impact of the previous monetary policy decisions may not have been fully transmitted into the economy.
However, the MPC resolved that taking further action was necessary to continue dampening the rising inflationary pressures and re-anchor inflation expectations while supporting the economic recovery process.
Signed by:
Dr. Wilson T. Banda
CHAIRPERSON, MPC.
