Malawi’s central bank cuts interest rates as inflation outlook improves

The Reserve Bank of Malawi cut its policy rate to 12% on November 6, the first time the central bank has reduced its policy rate this year.

“This decision is aimed at supporting economic recovery and job creation,” the central bank said in a statement. The monetary policy committee kept the Lombard rate and interest rates on deposits on hold at 12.2% and 3.75%, respectively.

The MPC noted headline inflation had declined and that the inflation outlook now looked “favourable”.

Inflation is projected to average 8.6% this year, down from the 9.8% projected at the last MPC meeting, held in August. In 2021, the central bank anticipates inflation will continue to decline.

The majority of the fall in inflation is being attributed to lower food prices. Headline inflation has declined from 11.5% in January to 7.1% in September. Meanwhile, non-food inflation has been “low and stable”, the central bank said, due in part to the “relatively stable” exchange rate and energy prices.

Between January and September 2020, the Malawian kwacha remained relatively stable against the US dollar. However, in recent months, the local currency has started to depreciate. Since the start of the year, the kwacha has now fallen 3% against the US dollar to 759.58 per $1.

In May 2012, the government adopted what it called a “de jure floating exchange rate”, which saw the kwacha depreciate around 33% against the dollar.

The International Monetary Fund noted in a December 2019 staff assessment that the central bank had yet to set a target exchange rate, and had “allowed substantial volatility in the exchange rate”.

However, the IMF noted the US dollar exchange rates showed remarkable stability of late, hinting authorities were in fact continuing to manage exchange rates. The central bank plans to adopt an inflation targeting framework by 2025.

Despite favourable inflation, the Reserve Bank of Malawi noted the Covid-19 pandemic had depressed growth to 1.2% this year, down from 5.1% in 2019. The central bank said manufacturing and tourism were some of the worst-hit areas.

The economy of sub-Saharan Africa as a region is projected to contract by 4% this year, which places Malawi in a better position than some of its peers.

The IMF’s latest projections indicate global growth will contract 4.4% this year. However, a rise in infections across Europe and the reintroduction of national quarantine restrictions could “pose a threat” to the recovery process, the Reserve Bank of Malawi said.

The pandemic has had a significant impact on Malawi. In May, the IMF agreed to provide $91 million in financial support to Malawi – 47.9% of the country’s quota – to help the country respond to the Covid-19 outbreak.

On October 21, the IMF disbursed an additional $101 million to help the country meet urgent balance of payment needs. “The IMF’s emergency financing… will help the authorities meet the large external financing gap and catalyse further assistance from the international community,” the IMF said.

In addition to lowering the interest rate, the Reserve Bank of Malawi also activated the Emergency Liquidity Assistance framework to support small banks in the event of worsening liquidity conditions.

The central bank has also stepped up its monitoring of financial sector risks. As a result, the central bank now conducts daily liquidity risk monitoring and enhanced offsite monitoring.