Advertisement
Business

Inflation policy rate gap sparks fresh debate

Advertisement

Reserve Bank of Malawi (RBM) Governor Wilson Banda has justified the recent Monetary Policy Committee stance to maintain the policy rate, which is seen way below headline inflation, rating the option as a systematic move to contain further pressure on the economy.

Most central banks target the rate of inflation as a primary measure for monetary policy, which is tightened by increasing interest rates to contain inflationary pressure.

But at 14 percent, the policy rate—the rate at which commercial banks borrow from the central bank as lender of last resort—is 13.5 percentage points below the headline inflation—the rate at which prices of commodities change in a given period in an economy—seen at 25.5 percent in July.

Advertisement

Addressing delegates to the 2022 Monetary Policy Conference in Lilongwe last week, Banda said, even in developed economies, the policy rate is much lower than the inflation.

However, most of them have lately been effecting big interest rate hike as inflation in the euro zone hit double digits.

But Banda said the local authorities’ recent stance not to adjust the policy rate upwards was undertaken to safeguard recent economic gains.

Advertisement

He said the central bank was aware that such decisions are creating negative real rate perceptions of what the market offers but a number of things guided the decision at the recent meeting of the Monetary Policy Committee (MPC).

“We needed to guard or protect the gains that we were making in economic recovery and an abrupt revision in the policy rate was really going to undermine the recovery.

“We would want to make sure that growth and development takes place in an environment where inflation is low and stable and where interest rates also go down and remain stable. Where we see transitory issues come into play, we want to be slow in reacting to those for fear that they undermine the very purpose of the monetary policy,” Banda said.

He said during this month’s MPC meeting, the committee will weigh the options to determine the next cause of action, with all factors considered.

During a panel discussion, one of the panellists, who is also former chief economist at the International Monetary Fund, Godfrey Kalinga, called on the central bank to be decisive in setting the framework to avoid pushing the burden ahead.

“When one looks at the past decade, it is clear that price stability was not the sole objective of the (monetary) policy. I think we need to do more. We have gone through a period when I do not believe in most of the statistics that are published. I think growth is much less than what we are given. I think politics has driven the number more than production.

“Between 2017 and 2021, the central bank and the authorities wanted monetary stability so they fixed the exchange rate. I think it depreciated by 2 percent in an environment where domestic prices doubled and this killed the local industry and it encouraged importation of foreign imports,” Kalinga.

Facebook Notice for EU! You need to login to view and post FB Comments!
Advertisement
Tags
Show More
Advertisement

Related Articles

Back to top button
Close

Adblock Detected

Please consider supporting us by disabling your ad blocker