Reserve Bank of Malawi to revise monetary policy framework

Post was last updated: July 18, 2018

BY WILLIAM KUMWEMBE:

The Reserve Bank of Malawi (RBM) plans to change the way it formulates the monetary policy to make it forward looking, more open and transparent.

RBM has traditionally been conducting monetary policy using a monetary aggregate targeting framework—founded on a quantity theory of money— where the effectiveness of monetary policy relies on the stability of money demand and velocity in circulation.

But addressing delegates during the launch of the Monetary Policy Technical Forum in Blantyre on Friday, RBM Governor, Dalitso Kabambe, said effectiveness of the framework has been largely impaired.

Kabambe said the current approach is predominantly backward looking, with limited scope for future economic analysis, and ignores the increasing role of expectations in macroeconomic developments.

He announced plans to modernise the policy framework by moving towards more forward -looking monetary policy regimes, such as inflation targeting, to circumvent challenges faced.

“In the new framework, the policy rate is set as an anchor for short term interest rates such that short term interest rates, particularly the interbank rate, is kept within a defined corridor around the rate,” Kabambe said.

He said the changes have been necessitated by the need to respond to evolving domestic and external macroeconomic dynamics and also align central bank operations with international practices.

He said, in the new framework, monetary policy decisions would be structured, evidence based, forward looking, transparent and properly communicated.

Meanwhile, Kabambe has said introduction of the Monetary Policy Technical Forum would also help the central bank in transparency and effective communication.

“Ultimately, what we want to achieve is that both monetary authorities and private sector agents should use similar information in forming their inflation expectations,” Kabambe said.

The forum would see convergence in information used by monetary authorities and private sector agents.

Bankers Association of Malawi President, Paul Guta, welcomed the initiative, saying it would help the country come up with informed and realistic economic projections.

Guta also said the forum is ideal for the central bank to be getting feedback and views directly from market players.

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