Malawi cuts rate another 100 bps, inflation slows further

May 3, 2019

By CentralBankNews.info
Malawi’s central bank lowered its policy rate by another 100 basis points to 13.50 percent, saying the monetary policy stance “remains adequately tight to guide inflation towards the medium-term objective of 5 percent” while future policy decisions will continue to be guided by inflation and progress in fiscal consolidation.
The Reserve Bank of Malawi (RBM), which has now slashed its rate in half in the last 2-1/2 years, also lowered its inflation forecast again while raising its forecast for economic growth.
RBM has cut its rate by 13.50 percentage points since November 2016 as inflation has dropped from almost 25 percent in December 2015 when two years of drought boosted food prices. Since then better weather has led to better harvests and helped stabilize the kwacha, which fell sharply from 2012 to March 2016.
Malawi’s inflation rate rose to 9.3 percent in March from 7.9 percent in February but the central bank considers this uptick a temporary response to uncertainty from the extent of crop damage due to cyclone Idai and going forward it expects food inflation to slow.
“Similarly, non-food inflation will continue to benefit from the relatively tight monetary policy, exchange rate stability and favorable international crude prices,” the central bank said.
RBM now expects inflation to average 8.0 percent in 2019, 0.5 percentage points lower than it projected in January, adding inflation in the first quarter of this year averaged 8.7 percent, down from 9.9 percent in the previous quarter.
Improved output from Malawi’s agricultural sector along with improved power supply and macroeconomic stability supported by fiscal consolidation is helping boost overall growth.
RMB raised its forecast for economic growth this year to 5.0 percent, up from its January forecast of 4.1 percent and 4.0 percent in 2018.
Last month the International Monetary Fund also forecast 2019 growth of 5.0. percent and said growth could rise further to 6-7 percent in the medium term, driven by infrastructure projects, crop diversification, greater access to finance and an improved business climate.
“Malawi’s economic outlook is favorable,” IMF said on March 14.
Since mid-2016 Malawi’s kwacha has remained stable and RBM said it expects this stability to continue for the rest of this year as foreign exchange reserves are expected to improve further following the start to the agricultural season.
The kwacha was trading around 734 to the U.S. dollar today, up from 737.65 at the end of March and 736.4 at the end of December 2018.
Official reserves rose to US$ 799.48 million, for 3.8 months of imports, up from $752.4 million in January.

The Reserve Bank of Malawi issued the following statement:

“The Monetary Policy Committee (MPC) met on 2nd and 3rd May 2019 to review the prevailing macroeconomic developments and the economic outlook.
Given the developments and the macroeconomic outlook, MPC has decided to: Reduce the Policy Rate by 100 basis points from 14.5 percent to 13.5 percent Maintain the Lombard rate at 0.4 percentage points above the Policy Rate
Maintain the Liquidity Reserve Requirement (LRR) on local currency deposits at 5 percent and the LRR on foreign currency deposits at 3.75 percent

Growth projected at 5.0% in 2019 From 4.0% in 2018 Rebound expected to be supported by: Recovery in agriculture sector Improved power supply Macroeconomic stability
MPC resolved to: Reduce the Policy rate by 1.0 percentage points from 14.5 percent to 13.5 percent Maintain the Lombard rate at 0.4 percentage point above the policy rate Maintain Liquidity Reserve Ratios on local currency and foreign currency deposits at 5.0 percent and 3.75 percent, respectively Policy stance remains reasonably tight to guide inflation towards the medium-term objective of 5 percent.

“Monetary Policy Committee reduces the Policy rate to 13.5 percent
The Monetary Policy Committee (MPC), at its 2 nd meeting for 2019 held on 2nd and 3rd May 2019, decided to reduce the Policy Rate by 100 basis points from 14.5 percent to 13.5 percent. The Committee, however, maintained the Lombard rate at 0.4 percentage points above the Policy Rate, the Liquidity Reserve Requirement (LRR) on local currency deposits at 5 percent and the LRR on foreign currency deposits at 3.75 percent. In arriving at this decision, the Committee observed that the positive macroeconomic outlook in 2019 envisaged during the first MPC of 2019 remains firm.


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Inflation is projected to slow-down further in 2019
Headline inflation slowed down to an average of 8.7 percent during the first quarter of 2019 from 9.9 percent recorded during the previous quarter. This was largely on account of a decline in non-food inflation which dropped to 5.8 percent from 8.9 percent in the last quarter of 2018. In March 2019, non-food inflation was recorded at 5 percent, similar to what was last achieved in March 1991, 28 years ago. This drop arises from consistent application of monetary policy and continued stability in the exchange rate. At 8.7 percent, average inflation rate in the first quarter of 2019, was 0.5 percentage points lower than the forecast. Food inflation in the first quarter of 2019 averaged 11.9 percent from 10.9 percent in the last quarter of 2018. In March 2019, food inflation was recorded at 14.4 percent. The March 2019 uptick in inflation is considered temporary arising from the uncertainty surrounding the extent of crop damage due to cyclone Idai. With the release of the second round national crop estimates, going forward, food inflation is expected to slow down as the country has been estimated to register a maize surplus of about 233,035 metric tonnes. Similarly, non-food inflation will continue to benefit from the relatively tight monetary policy, exchange rate stability and favourable international crude oil prices. Based on these developments, baseline inflation projection has further shifted downwards. Inflation is now projected to average 8.0 percent in 2019, 0.5 percentage points lower than projected during the first MPC of 2019.

Global economic developments
The global growth is now projected at 3.3 percent in 2019, lower than an earlier projection of 3.6 percent following geopolitical developments and tightening of global financial conditions. Global oil prices are expected to remain broadly stable, trading at around US$70 dollars per barrel in 2019.

The domestic economy is projected to recover in 2019
Gross Domestic Product growth for 2019 is estimated at 5.0 percent, an improvement from the growth rate of 4.0 percent in 2018. The rebound in growth is expected to be supported by the agriculture sector, improved power supply, continued macroeconomic stability as well as the easing of monetary policy. The macroeconomic stability will be supported by fiscal consolidation.

Exchange rate stability to continue
The exchange rate remained broadly stable and traded at K737.6517 per US dollar at the end of March 2019 from K736.4394 per US dollar at the end of December 2018. Official reserves stood at US$799.48 million (3.8 months of imports), 0.2 months higher than US$752.4 million (3.6 months of imports) reported during the first MPC. Total foreign exchange reserves, including those held by the private sector, stood at US$1.1 billion (5.3 months of imports). The foreign exchange reserves position is expected to improve further following the commencement of the agriculture marketing season. It is therefore expected that the current stability in the exchange rate will continue for the rest of 2019.

Monetary policy eased
The MPC noted that the projected improvement in macroeconomic outlook for 2019 remains firm, with inflation projected on a downward trend. Notably, there has been significant decline in non-food inflation, a trend which is expected to be sustained in the medium term. The MPC therefore resolved to reduce the Policy rate by 1.0 percentage points from 14.5 percent to 13.5 percent. The Lombard rate has been maintained at 0.4 percentage points above the policy rate. The Liquidity Reserve Ratios on local currency and foreign currency deposits have been maintained at 5.0 percent and 3.75 percent, respectively. At this level, the policy stance remains adequately tight to guide inflation towards the medium-term objective of 5 percent. Monetary policy decisions will continue to be guided by inflation forecasts and outcomes as well as progress in fiscal consolidation measures.

Reference rate for commercial banks base lending rates
Further to the January 2019 MPC decision whereby the Lombard rate was designated as the base lending rate for commercial banks, the Committee refined the determination of the base rate by introducing other rates. The base lending rate for Commercial Banks will now be a weighted average of the Lombard rate, the Interbank rate, the 91-day Treasury bill rate, and the Savings rate. Further details on its calculation will be communicated in due course.”

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