National Planning Commission (NPC) Director General Thomas Munthali has said cutting interest rates now could help tame inflation in the medium to long term.
Munthali was speaking when he made a keynote address at the Financial Market Dealers Association (Fimda) Annual Conference.
Munthali’s sentiments come as headline inflation was seen at 27.8 percent in September and threatens to run away as the country approaches the lean season between January and March in as far as food supply is concerned.
Recently, the Monetary Policy Committee of the Reserve Bank of Malawi hiked the policy rate from 22 to 24 percent to contain the rather high inflation.
But according to Munthali, the challenge with Malawi is that the country has followed Western economics where when inflation is high, they raise interest rates to tame the sharp rise in prices of goods.
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He said inflation is an indication of low supply in the market.
“The price of goods and services will go up if there are fewer, but the demand is too high. Now in our case, it is because we have too few goods and services in the market, as simple as that.
“So, for you to produce more goods and services, it means the cost of production has to be low. Now the cost of production comes by interest. If for instance inflation is going up and you reduce the interest rates, the ability of the producers to produce more becomes high,” Munthali said.
He observed that, eventually, inflation becomes short-lived because sooner there will be flooding of the market with goods and services and inflation tappers off.
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“You see the challenge that we have goods and services is that we have followed Western economics. In Western countries, they operate at more or less maximum production capacities. So, when you increase interest rates, there is not going to be any more production anyway because they have reached the apex.
“But for us, if you reduce interest rates, you can be assured that there will be higher production in the market. We need to have a proper diagnosis of the challenges which we have as a nation. Yes, stability of prices is important, but at the expense of what?” Munthali said.
In an interview, economist Betchani Tchereni said recent foreign exchange auctions were creating unnecessary holding of items in anticipation of a depreciation stemming from the auctions.
“We need to devalue the Kwacha carefully. First, we need to have a buffer of the foreign exchange so that the black market should be disincentivised to have the foreign exchange and give it back to the mainstream. That way, we will stabilise exchange rates,” Tchereni said.
But RBM spokesman Mark Lungu said the normal response from monetary authorities when inflation is rising is to raise interest rates and that one cannot fault monetary authorities for doing that.
“What we should be looking at is that while we are fighting inflation through demand measures, we should be fixing the supply side bottlenecks which would boost foreign exchange generation. In that case, National Planning Commission is very key,” Lungu said.
