BLANTYRE-(MaraviPost)-Money borrowers from commercial banks and other money lending institutions should brace for tough times ahead following a decision by Reserve Bank of Malawi (RBM)’s Monetary Policy Committee (MPC) to hike the Policy rate by 400 basis points, from 18 to 22 percent.
The policy rate hike follows MPC meeting held from April 26 to 27, 2023 in Blantyre.
This comes amid 25% Malawi Kwacha’s devaluation that has affected businesses.
Malawians are currently struggling with high cost of living due to devaluation President Lazarus Chakwera Tonse administration made.
According to a statement signed by MPC Chairperson and RBM Governor Wilson Banda, the committee has also increased the Liquidity Reserve Requirement ratio on domestic currency deposits by 200 basis points to 5.75 percent.
Banda said the committee noted that the inflation outlook had worsened since the last MPC meeting, mainly due to unforeseen domestic shocks.
“In particular, the occurrence of cyclone Freddy in Southern Malawi and localised drought in Northern Malawi had worsened the food supply prospects and strengthened adverse supply-side inflationary pressures.
“The Committee also observed that the need to rehabilitate the infrastructure damaged by the cyclone has the adverse impact of amplifying aggregate demand and fuelling inflation, requiring further tightening of monetary policy to dampen the demand effects,” reads MPC statement in part.
MPC adds, “In view of these developments, the Committee resolved to increase the Policy rate by 400 basis points to 22.0 percent and the LRR ratio on domestic currency deposits by 200 basis points to 5.75 percent.
“However, the LRR ratio on foreign currency deposits and the Lombard rate were maintained at 3.75 percent and 20 basis points above the Policy rate, respectively“.
The next MPC meeting is scheduled for July 26 to 27 July 2023.
Below is the full MPC statement on Monetaty Policy:
STATEMENT OF THE MONETARY POLICY COMMITTEE SECOND MEETING OF 2023 27TH APRIL 2023
Monetary Policy Committee Raises the Policy Rate to 22.0 Percent and the Liquidity Reserve Requirement (LRR) Ratio on Domestic Currency Deposits to 5.75 percent.
The Monetary Policy Committee (MPC) convened on 26th and 27th April 2023 to review the recent economic developments and decide on the monetary policy stance. The MPC noted that the inflation outlook had worsened since the last MPC meeting, mainly due to unforeseen domestic shocks.
In particular, the occurrence of cyclone Freddy in Southern Malawi and localised drought in Northern Malawi had worsened the food supply prospects and strengthened adverse supply-side inflationary pressures.
The Committee also observed that the need to rehabilitate the infrastructure damaged by the cyclone has the adverse
impact of amplifying aggregate demand and fueling inflation, requiring further tightening of monetary policy to dampen the demand effects.
In view of these developments, the Committee resolved to increase the Policy rate by 400 basis points to 22.0 percent and the LRR ratio on domestic currency deposits by 200 basis points to 5.75 percent. However, the LRR ratio on foreign currency deposits and the Lombard rate were maintained at 3.75 percent and 20 basis points above
the Policy rate, respectively.
Global Real Output Growth to Moderate in 2023
The MPC noted that global growth is expected to remain subdued. The IMF World Economic Outlook (WEO) released in April 2023 projects a slowdown in global real output growth to 2.8 percent in 2023 from 3.4 percent in 2022.
The 2023 growth forecast is also 0.1 percentage point below the initial projection presented in the January 2023 WEO. The moderation reflects largely the impact of continued tight monetary and financial conditions, particularly in the advanced economies. In 2024, global real output growth could rebound to 3.0 percent, as the tight global financial conditions are expected to dissipate.
The Committee observed that the advanced economies are the most adversely affected, as their projected real output growth of 1.3 percent for 2023 is over half below the 2.7 percent achieved in 2022, albeit 0.1 percentage point higher than the January 2023 WEO forecast.
The modest growth in 2023 is not surprising considering that central banks in these economies have generally been the most aggressive in the fight against inflation through tight monetary policy. For 2024, growth in advanced economies is projected at 1.4 percent.
Meanwhile, emerging markets and developing economies are also projected to register a slightly lower output growth of 3.9 percent in 2023 compared to 4.0 percent for 2022, but could strengthen to 4.2 percent in 2024. Growth in all the sub-regions has been revised downwards except for the Emerging and Developing Asia where growth has been maintained at the January 2023 WEO forecast of 5.3 percent.
In the Sub-Saharan Africa (SSA) region, the 2023 growth is projected at 3.6 percent, a slowdown from 3.9 percent in 2022 and the January 2023 WEO forecast of 3.8 percent, but could recover to 4.2 percent in 2024. The moderation in 2023 largely reflects the impact of funding challenges following the prevalence of tight financial conditions, in addition to deteriorating terms of trade against the region’s member states.
Global Inflation to Decelerate in 2023
The MPC noted that global energy and food prices continue to decline. This, coupled with the weakening of aggregate demand on account of prolonged tight monetary and financial conditions, is expected to lead to disinflation in 2023.
As reported in the IMF’s April 2023 WEO, disinflation of 7.0 percent is forecast for 2023, from 8.7 percent in 2022. However, the 7.0 percent represents an upward revision from 6.6 percent projected in the January 2023 WEO. The revision follows the observation that core inflation is sticky and yet to peak.
With the fight against inflation amid declining global commodity prices expected to continue, inflation could decline to 4.9 percent in 2024.
Domestic Economic Growth to be Modest
The Committee observed that prospects of the 2023 domestic economic recovery faces some headwinds, such that the 2.7 percent growth for 2023 is likely to be revised downwards.
This follows the impact of the cyclone Freddy and localised drought which are expected to yield a lower-than-initially projected agricultural output, in addition to the impact of limited access to fertilizers during the 2022/23 crop production season; and prolonged electricity power cuts at the beginning of 2023 as well as protracted foreign exchange supply shortages which are expected to dampen non-agricultural output.
Merchandise Trade Deficit to Persist
On merchandise trade, the MPC noted that preliminary statistics from the National Statistics Office indicate that the trade deficit widened to US$283.5 million during 2023Q1, from a deficit of US$15.7 million during 2022Q4, but
was narrower than a deficit of US$388.2 million for 2022Q1.
Meanwhile, the reopening of main markets for the country’s major exports in 2023Q2, is expected to improve export inflows during that period.
Exchange Rate Pressures to Persist
The Malawi Kwacha/US Dollar TT exchange rate remained relatively stable and closed 2023Q1 at K1,033.80 per US Dollar.
The stability against the US Dollar allowed the local currency to replicate the latter’s performance against other key
currencies. Notably, the kwacha lost 2.6 percent (MK32.72) against the British Pound and 2.3 percent (MK25.74) against the Euro, but gained 4.7 percent (MK1.96) against the South African Rand.
Meanwhile, the Bureaux Malawi Kwacha/US Dollar cash exchange rate registered a depreciation of 4.5 percent
and traded at K1,491.98 per US Dollar at the end of 2023Q1.
Domestic Inflationary Pressures to Persist
The MPC noted that headline inflation averaged higher at 26.5 percent in 2023Q1 than 26.0 percent for 2022Q4 and compared to 12.1 percent for 2022Q1.
Food inflation declined to 31.5 percent from 33.1 percent in 2022Q4, partly reflecting the impact of opening of some of ADMARC’s maize markets, which helped to stabilise prices during 2023Q1. In addition, the seasonal increase in the supply of vegetables during review period, which constitutes about 12.0 percent of the food basket, further contributed to the moderating food price pressures.
The above notwithstanding, pressures mounted on non-food inflation, as evidenced by the increase to 20.4 percent in 2023Q1 from 18.3 percent in the previous quarter. The sources were high costs of items under the transportation,
hospitality services, as well as alcohol and tobacco categories.
On the outlook, the MPC noted that the onset of the food crop harvesting period in 2023Q2 will likely result in a slowdown in food inflation during the quarter.
However, considering the relatively lower food crop size, the lean period would set in earlier than normal. The Committee further observed that the optimism that the declining commodity prices would translate into a non-food disinflation was no longer realistic in the face of heightened demand-side inflationary pressures arising from fiscal risks and second-round effects of the cyclone, in addition to exchange rate pressures.
The foregoing has changed the earlier prospects of disinflation in 2023. Instead, headline inflation is projected to average higher at 24.5 percent in 2023 than 18.2 percent projected during the previous MPC meeting and compared to 20.9 percent for 2022.
The MPC Consideration and Decision
The MPC noted that inflation is set to remain elevated in 2023, as the risks which emerged during the review quarter fuelled both adverse supply-side and heightened demand-side inflationary pressures.
The Committee observed that such a high inflationary environment is not conducive for economic growth. Therefore, the Committee decided to address inflationary pressures by increasing the Policy rate by 400 basis points to 22.0 percent as well as the LRR ratio on local currency deposits by 200 basis points to 5.75 percent.
However, the LRR ratio on foreign currency deposits and the Lombard rate have been maintained at 3.75 percent and 20 basis points above the Policy rate, respectively.
The Committee acknowledges that to address the prevailing economic challenges and restore macroeconomic stability, monetary policy actions alone are not sufficient. Monetary policy needs to be complemented by supportive fiscal policy.
Signed by Dr Wilson T. Banda
CHAIRPERSON, MPC.
