Firm sees inflation averaging 9% in 2018

Investment management and advisory firm, Alliance Capital, has predicted that inflation would average nine percent in 2018 despite a double threat of fall armyworms and dry spell which have affected maize production, threatening the lives of 850,000 households.

Food remains the biggest contributor to the Consumer Price Index with a weighing of 50.2 percent.

The nine percent average inflation could be 2.5 percentage points better than the 11.5 percent recorded in 2017.

In its Economic Report for 2017 and Outlook for 2018, Alliance Capital said it expects inflation to continue declining albeit marginally in 2018 on the back of uninterrupted food supply, a stable currency and tight fiscal and monetary policies.

“Food prices, especially maize which declined sharply in 1Q through 3Q, declined further in December, thus improving the near-term outlook for Inflation considerably.

“Of particular concern is how dry spells ensued around mid- December. Should they continue up to mid-February, we should expect a decline in maize output than earlier expected. This will in turn influence maize prices. Overall, we expect inflation to average nine percent in 2018,” Alliance Capital said.

With inflation averaging nine percent in 2018, the firm said it expects the unwinding of monetary policy to continue, though very cautiously as the authorities try to foster price stability and support the kwacha further.

It noted that it expects the Reserve Bank of Malawi to elevate its vigilance in liquidity management operations to steer the economy on the demand side, in light of the expected pickup in consumer spending, as well as spending associated with the upcoming elections.

“Overall, the stance of monetary policy will move in consonance with its major determinant which is inflation,” said Alliance Capital.

The firm has further predicted the kwacha to remain stable unless there are shifts in major fundamentals.

Alliance Capital said it expects tobacco, coffee and tea output to rise marginally and envisage better prices on the global market.

“Proceeds from these cash crops will augment foreign exchange supply. We expect import cover to improve further on the back of improved foreign exchange availability and less intervention,” said Alliance Capital, a subsidiary of South Africa-based Vunani Group.

With monetary stance expected to remain, Alliance Capital said it expects the benchmark interest rate, the policy rate, to remain at 16 percent at least for the first quarter of 2018 with a possible cut at the second Monetary Policy Committee meeting for 2018.

“The money market rates, especially overnight lending rates, are expected to remain elevated as tight liquid conditions continue in the market on account of Reserve Bank’s open market operations.

“We expect yields on government securities to remain range bound and tracking the policy rate,” Alliance Capital said.