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Mixed views on RBM inflation forecast

Post was last updated: February 6, 2023

Economists have expressed mixed views on the Reserve Bank of Malawi (RBM) 2023 inflation rate projection of 18.2 percent, with some describing it as over-optimistic looking at how the drivers of inflation are evolving.

Speaking in an interview on Friday after the forecast contained in the first 2023 Monetary Policy Committee (MPC) Statement, economist Bond Mtembezeka said the food output situation and the foreign exchange shortages present strong upside risk to inflation rate, currently at 25.4 percent as of December 2022.

RBM headquarters in Lilongwe

He said: “The food output situation plus the foreign exchange shortages present strong upside risk to inflation and I don’t think that risk will abate any time soon.

“Commodity prices may ease on the global market, but domestic macro-economic factors will counter that easing and will pose a challenge.”

In a separate interview, Catholic University of Malawi head of economics Hopkins Kawaye said inflation movement will depend on the maize availabilityand prices of goods on the domestic market.

“In recent months, inflation has stabilised, but attaining the RBM inflation projection will depend on the maize availability and prices on the domestic market,” he said.

In the MPC Statement signed by RBM Governor Wilson Banda, the central bank said pressures are expected to remain high for domestically produced food commodities, particularly cereals, due to high costs of farm inputs such as fertiliser, which has affected access of the commodity for crop production.

However, he said the 2023 inflation rate projection is on account of declining key imported commodities, which is easing imported inflation and also the heightening risk of a global recession amid tight financial and monetary conditions.

Said Banda: “The MPC observed that the outlook depicted an ease to inflation pressures in 2023 as the factors which triggered such pressures were subsiding.

“Despite this optimism, the committee noted that inflation was likely to remain in double-digit in 2023, making it unconducive to support economic growth. At the same time, the MPC opined that loosening monetary policy in a double-digit inflationary environment could reverse the expected downward inflation path.”

In the last quarter of 2022, headline inflation increased to an average of 26 percent from 25.3 percent the previous quarter (July to September).

But on an annual basis, headline inflation averaged 21 percent in 2022 from 9.3 percent in 2021, according to the RBM.

Meanwhile, MPC has since maintained the policy rate, the rate at which commercial banks borrow from RBM as the lender of last resort, at 18 percent, the liquidity reserve requirement ratio on domestic and foreign currency denominated deposits at 3.75 percent and the Lombard rate at 20 basis points above the policy rate.

Malawi Confederation of Chambers of Commerce and Industry chief executive officer Chancellor Kaferapanjira said maintaining the policy rate is good for business.

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