The Reserve Bank of Malawi (RBM) has indicated that a tight monetary policy stance it has adopted may be implemented for a prolonged period to ensure commodity price stability.
A tight monetary policy entails a stance by a central bank to manage the availability of money and credit in an economy, typically to curb inflationary pressure and ensure stability.
Among other factors, central banks increase the policy rate—a key driver of interest rates on loans— which traditionally triggers a rise in interest rates.
Basically, the bank reduces money supply, increases interest rates and limits lending to commercial banks.
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However, the approach makes borrowing more expensive and less accessible, which, in turn, reduces consumer spending and business investments.
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In its recent Market Intelligence Report, the RBM says the prevailing high food price is a cause for concern, as it could delay the disinflation process.
“The slow progress on inflation means that monetary policy may be needed to remain tight for an extended period of time.
“The RBM will therefore continue to monitor developments closely and stand ready to act, as and when appropriate,” reads the report.
In an interview, Bankers Association of Malawi President Macfussy Kawawa said the stance will negatively affect the banking business.
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“Given the trend in inflation, tight monetary policy was expected. To the banks, this entails an extended period of subdued demand for credit and likely, a rise in loan default rates,” Kawawa said.
Malawi University of Business and Applied Sciences-based economist Betchani Tchereni said a tight monetary policy remains a right intervention for the economy.
“Actually, we need an even tighter monetary policy stance if stabilisation is anything we want to achieve.
“Our appetite for imports is directly linked to our appetite to borrow for consumption and trading. This means therefore that to control inflation it is imperative that the monetary policy stance be tighter,” Tchereni said.
In April, the RBM increased the Policy rate by 400 basis points to 22 percent noting that inflation was set to remain elevated in 2023.
It said the risks which emerged during the review quarter fuelled both adverse supply-side and heightened demand-side inflationary pressures.
The central bank’s Monetary Policy Committee observed that such a high inflationary environment is not conducive for economic growth,” a monetary policy committee report reads.
The economy suffered a 3.3 percentage point increase in inflation to 29.2 percent in May from 25.9 percent in January, with the RBM forecasting the general rise in prices to average 24.5 percent in 2023 from an earlier prediction of 18 percent.
