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High inflation hurts economy

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A study by the Reserve Bank of Malawi (RBM) has shown that persistently high inflation has a long-run negative impact on economic growth.

The study, which analysed annual data from 1980 to 2020 using the autoregressive distributive lag (ARDL) model, concluded that increased inflation levels are detrimental to economic activity in the country.

The study, whose results were released on Friday, shows that higher levels of inflation rates affect business confidence and also money loses its value as a store of wealth and these negatively affect economic growth.

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“Low and stable, and most importantly, predictable inflation is good for the economy.

“Price stability promotes economic growth by providing an environment in which economic decisions can be made and markets can operate without concerns about unpredictable fluctuations in the purchasing power of money,” RBM says.

According to the study, price stability boosts investor confidence and macroeconomic stability.

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Currently, RBM’s monetary policy objective is to keep inflation within a range of 5 percent plus or minus two.

The target range allows for unanticipated short-term shocks while managing public inflation expectations.

“The RBM should therefore continue efforts to achieve its objective of price stability to complement other government policies aimed at creating a conducive environment for sustained and increased economic activity in the country.

“The growth problem is mainly structural in nature, beyond the reach of monetary policy alone,” the study says.

The central bank says balanced and sustainable growth requires contributions from many other components of government and society.

It says the country needs to maintain prudent macroeconomic policies and make further progress on a range of structural issues.

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