The Monetary Policy Committee (MPC) of the Reserve Bank of Malawi has agreed to maintain the policy rate at 26 percent.
Simply put, a policy rate is a short-term reference rate set by a central bank.
In a statement on Friday, MPC said it arrived at the decision during its meeting on November 4 based on the economic and monetary outcomes and outlook.
The statement, signed by MPC Chairperson Wilson Banda, says the committee also decided to maintain the Lombard rate at 20 basis points above the policy rate and the Liquidity Reserve Requirement (LRR) ratio at 3.75 percent for foreign currency deposits.
According to the statement, the committee has, however, resolved to raise the LRR ratio for domestic currency deposits by 125 basis points to 10.0 percent.
“In making this decision, the committee noted that although inflation has remained elevated, there are strong prospects of slowing down from the fourth quarter of 2024, on account of favourable base effects.
“The committee also noted that money supply continues to grow sharply, posing risks to the inflation outlook. In this regard, the MPC believes that tightening through LRR ratio for domestic deposits will slow down the money supply growth pressures and enhance the envisaged inflation deceleration process in the short to medium term,” Banda says.
Economist Marvin Banda said the LRR is the most effective monetary tool that the RBM can use to fight structural problems that affect the economy.
He said raising the domestic LRR greatly improves the precision with which monetary policy can be conducted by restricting the growth of broad money that is created to cater for government spending.
He observed that the problem of inflation, though exacerbated by increases in maize prices (average 53 percent of CPI) and the potential spillover effects to non-food inflation, is a money problem.
According to Banda, RBM is doing too little, too late to address the obvious causes of sustained high prices and inflation in Malawi.
“The bank has adequate tools to combat inflation yet there is heavy reluctance to operate sound monetary policy because of the effects of the runway fiscus,” Banda said.
