The Reserve Bank of Malawi (RBM) has maintained the policy rate at 26 percent, citing a positive inflation outlook for 2025 and the need to protect productive sectors of the economy.
During a press briefing in Blantyre Thursday, RBM Governor Macdonald Mafuta Mwale said the decision follows projections of moderating inflation levels this year compared to 2024, creating potential room for future rate adjustments.
He said the central bank’s decision also considered the impact of previous monetary policy measures, including the increased liquidity reserve requirement that reduced money supply by K46 billion last year.
Mwale said maintaining current measures could help them continue managing money supply effectively while supporting inflation reduction beyond 2025.
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“We have very good indications that in 2025, inflation will moderate to lower levels compared to 2024. So, 2025 is being seen as a better year, in terms of production, than 2024. We need to balance monetary policy decisions with supporting productive sectors,” he said.
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Mwale warned that increasing the policy rate could harm manufacturing companies that depend on borrowing.
“If we increase the policy rate now, what will be the impact on the production units? The benefits of doing that could actually be outweighed by the negative effects on our production units,” he said.
On government spending, Mwale said its inflationary impact depended on financing sources, with borrowing from commercial banks having a limited effect compared to central bank financing.
In an interview, economist Marvin Banda said there was wisdom by RBM to not penalise private sector borrowers while rewarding banks.
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He said Malawi’s economy, which is fiscal dominant, has always shown that the policy rate is not the most effective tool for containing non-food inflation due to non-conditional persistent borrowing by the fiscus.
“The domestic liquidity reserve ratio (LRR) is the most effective tool for taming the banking sector, which is extremely government debt-dependent at the expense of the private sector. Raising the policy rate is ineffective at taming government’s appetite to borrow.
“It has to be remembered that the biggest component of inflation is the food component, which RBM can never control since 53.7 percent of the Consumer Price Index derivative is food forced. The other factors, such as availability of forex as well as fuel procurement and fertiliser availability, have other actors responsible for them for which productivity is the only long-term cure. Going forward, the RBM’s hope of a 5 + 2 percent medium term target remains a pipedream and unattainable,” Banda said.
Inflation is forecast to decline from 32 percent in 2024 to 24.2 percent in 2025, potentially lowering interest rates and boosting private sector credit access to stimulate growth.
