Fears over risk of inflation reversal

Post was last updated: April 20, 2018

The International Monetary Fund (IMF) has indicated that the risk of inflation reversal is now more real following quickening of the inflation rate to 9.9 percent year-on-year in March, from 7.8 percent the previous month.

This becomes the highest inflation rate on record since inflation made a historic turn to hit single digit at 9.3 percent in August, from 10.2 percent in July 2017.

Both IMF and the Economics Association of Malawi (Ecama) have indicated that the rising inflation rate is something that was expected.

IMF Resident Representative to Malawi, Jack Ree, said following these developments macroeconomic policy should continue to focus on entrenching the gains in macroeconomic stability.

Among other things, Ree said this will require reigning in on budget deficits, which increased significantly in the first half of 2017/18 fiscal year due to revenue shortfalls and spending overruns.

He said it will also require continued caution in the conduct of monetary policy, including RBM’s interest rate decisions.

“The re-rise of inflation to 9.9 percent in March is not something unexpected. In fact, disinflation since July 2016, when inflation rate peaked at 23.5 percent, to end-2017, has been driven mainly by the sharp deceleration of food price amid extraordinarily suppressed maize price.

“…experts have expected inflation to rebound as maize price goes back to more historically normal levels,” he said.

According to Ree, fighting inflation is about managing expectations and he said this would only be possible, when the market has trust in a credible policy framework.

He said the IMF’s Extended Credit Facility (ECF) programme is designed to underpin this sort of credibility.

As it stands, the IMF and government authorities reached a staff level understanding on a new ECF programme in February.

“The IMF Board meeting to consider the programme is scheduled for late April. If this programme is approved and consistently implemented, I am confident that we will be able to manage a temporary reversal of inflation and lock in a new trend of high growth and stable inflation,” Ree said.

In a separate interview, Ecama President, Chikumbutso Kalilombe, said while the rise was something that was expected, there is optimism that inflation may decelerate in April.

“The good thing is that we remain in single digit band; otherwise, this was expected, as we are at the peak of the lean season,” he said.

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