New RBM governor makes first major decision, maintains policy rate at 13.5%

Wilson T. Banda

Reserve Bank of Malawi's new governor, Wilson T. Banda has announced the central bank's first major decision since taking up the mantle early in July. RBM's Monetary Policy Committee (MPC) has decided to maintain the bank rate-one of the determinants of interest rates-at 13.5 percent.

Banda who chairs the MPC, announced on Friday that at its third meeting of 2020 held on 30th and 31st July, the committee also decided to maintain the Lombard Rate at 0.2 percentage points above the policy rate and the Liquidity Reserve Requirement (LRR) on local and foreign currency deposits at 3.75 percent.

"In arriving at this decision, MPC noted that although inflation developments were favourable in the first half of the year, there are emerging upward risks to the medium-term inflation path. Meanwhile, economic activities have slowed down leading to a lower projection of GDP for 2020, reflecting the effects of COVID-19 pandemic on various sectors of the economy.

"The adopted policy stance is therefore considered appropriate to contain the impending inflationary pressures while at the same time providing space for supporting recovery of the economy, in the wake of the COVID-19 pandemic," he said.

RBM last reduced the policy rate from 14.5 percent to the current rate 13.5% in first half of 2019. Since then the Committee not made any further changes.

Economic slow down

RBM has also projected economic growth to slump to less than 2 percent from the earlier forecast of 5.5 percent.

"The downward revision was on account of the impact of protracted political uncertainty in the first half of the year and the COVID-19 pandemic including the associated containment measures. The pandemic has significantly affected most sectors of the economy such as the manufacturing, tourism and accommodation, health, wholesale and retail trade, financial services, real estate and construction sectors," says the central bank.

While imports of COVID-19 imports have rises, Malawi's traditional exports have slowed down, due to reduced global demand and border closures have resulted into worsening of the current account balance and therefore declining foreign exchange supply.

"The RBM will continue to manage excess volatility of the exchange rate on the foreign exchange market," says Banda

RBM also projects 2020 inflation at 9.8 percent, 0.4 percentage points higher than 2019's 9.4 percent. 

"Headline inflation declined to an average of 8.9 percent in the second quarter of 2020 from an average of 10.6 percent in the first quarter, on the back of weakening food and domestic pump fuel prices.

"However, there are impending significant inflationary pressures emanating from a gradual pick-up in food prices (largely maize), increased short term pressure on the exchange rate, increase in global oil prices and increased public sector financing requirements," the bank projects.