The Reserve Bank of Malawi (RBM) says it targets an inflation rate of five percent in the medium term.
The development comes when inflation inched up in January from 7.1 percent to 8.1 percent following a rebasing process by the National Statistical Office.
In its sixth Monetary Policy Statement titled ‘Sustaining Low Inflation Amidst New Risks’ released on Tuesday, RBM says the monetary policy stance during the first half of 2018 will focus on entrenching disinflation and attaining the targeted five percent inflation in the medium term and maintain a minimum of three months import cover of official foreign exchange reserves.
The statement signed by RBM Governor, Dalitso Kabambe, said tight monetary policy will be kept in place by ensuring that the policy rate, currently at 16 percent, remains above inflation rate and by using liquidity operations to maintain positive interest rates in the interbank and Treasury bill markets.
Headline inflation, according to the central bank, is projected to average 10.5 percent in 2018, and expected to close the year at around 9.5 percent.
“Therefore, monetary policy actions in 2018 will focus on ensuring that inflation is kept within a corridor of 9 to 10 percent. In addition, monetary policy will continue to aim at maintaining a stable and sustainable foreign exchange market that continues to foster a market determined par value of the Malawi currency.
“This means that the Bank will continue to aim at maintaining international reserves of at least three months of prospective imports in the short to medium term while interventions will be restricted to manage excessive volatility,” Kabambe said.
The bank was quick to note that the inflation outlook is subject to potential upside risks, emanating from delayed fiscal adjustment in the lead-up to elections in 2019, and an upward adjustment in utility tariffs.
RBM said monetary policy does not expect severe adverse shocks to food prices in 2018. Nevertheless, the bank said the fall armyworms and sporadic dry spells as well as a generally uneven rainfall distribution in the 2017/18 agriculture season may weigh negatively on the macroeconomic trajectory.
“Enough maize stocks in the national silos and the carryover stocks from the 2016/17 yield held by farmers and the private sector are expected to provide sufficient cushion against the said adversaries.
“Government’s communication on these matters will contain any negative speculation about maize prices,” Kabambe said.
The central bank chief said there are mixed risks to non-food inflation, saying the recent electricity and water tariff adjustments may adversely affect the inflation outlook for 2018, especially in the first half of 2018.
“Pressure on pump prices has started easing as global crude oil prices ceded from $70 per barrel lately to the current $65 per barrel. The consensus outlook is that international oil prices will remain around the $60-65 range, which should ordinarily not pose any threats to the automatic pricing mechanism. Furthermore, the price stabilisation fund has sufficient resources to absorb any transient pressures on the triggers for automatic pricing mechanism (APM).
“Inflation expectations are also expected to remain mild in 2018. However, the rebasing of the consumer price index, with a relatively higher weight on the non-food component of the consumer price index, could potentially lead to an upward tilt in the inflationary process in 2018. Nevertheless, the RBM’s outlook already takes this into account in its baseline projections for inflation,” Kabambe said.