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Malawi cuts rate 1st time in 2020 on lower growth, CPI

Sunday, November 8, 2020 14:41

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Malawi’s central bank cut its benchmark interest rate for the first time this year to boost economic activity, saying inflation and growth are expected to be lower this year than expected in July.

The Reserve Bank of Malawi (RBW) cut its policy rate by 150 basis points to 12.0 percent, its first rate cut this year though it lowered both its liquidity reserve requirement (LRR) and Lombard rate in April to boost liquidity in the banking system and lower the cost of funds to help those economic sectors that were affected by the spread of the COVID-19 pandemic.

It was also RBW’s first rate cut since May 2019 and the cut extends the bank’s monetary easing cycle that was begun four years ago in November 2016. Since then the rate has been cut 7 times by a total of 15 percentage points.

While RBW lowered its policy rate today, it maintained the LRR on domestic and foreign deposits at 3.75 percent and the Lombard rate at 20 basis points above the policy rate.

”In arriving at this decision, the Committee noted that headline inflation has been declining since January 2020 and the inflation outlook appears favorable,” RBW said in a statement from Nov. 6, adding the decision was aimed at supporting the economic recovery and job creation.

Inflation in Malawi decelerated for the 9th consecutive month to 7.1 percent in September from 11.5 percent in December 2019 and the central bank projected it would average 8.6 percent this year and decline further next year.

In its previous policy statement from July, when it left the rate steady due to emerging risks to the path of inflation from food prices and the exchange rate, RBW forecast 2020 average inflation of 9.8 percent, up from 2019′s 9.4 percent.

The outlook for the economy of land-locked Malawi has worsened with the accelerated spread of the coronavirus in the country, the International Monetary Fund (IMF) said in October after its executive board approved a second disbursement of funds (US$101.96 million) under the Rapid Credit Facility, bringing the total emergency support to US$193 million.

The additional IMF funds aim to meet the country’s rising external financing gap and provide fiscal space to address critical spending needs, such as income support and food to the most vulnerable.

The country’s manufacturing, tourism and accommodation, health services, wholesale and retail trade sectors remain the hardest hit and RBW lowered its forecast for economic growth this year to 1.2 percent from the July forecast of 1.9 percent, and down from 5.1 percent growth in 2019.

The bank added the country’s trade deficit had risen to US$1.5 billion in the first 9 months of the year from a $1.1 billion deficit in the same period last year.

However, inward remittances, particularly from South Africa, had picked up in recent months to $52.5 million in the third quarter from $32.1 million in the second quarter as lock-down measures were eased.

Malawi’s kwacha has been volatile in recent years and tumbled some 75 percent from May 2012 to May 2016, hit by a combination of aid suspension by the U.K. and other international donors, including the IMF, in response to poor governance and a sharp fall in the export of tobacco.

The fall in the kwacha triggered a jump in inflation, which soared to 38 percent in February 2013, and the central bank met the rise in inflation by raising its key rate by 14 percentage points from May 2012 to 27.0 percent by November 2015.

Since July 2016 the kwacha has been more stable though it has depreciated since the start of September and fell further following the rate cut to trade at 759.5 today, down 2.5 percent this year.

The Reserve Bank of Malawi released the following statement about the fourth meeting of 2020 by its monetary policy committee:

“The Monetary Policy Committee (MPC), at its fourth meeting of 2020 held on 5th and 6th November 2020, decided to reduce the Policy rate to 12.0 percent. Meanwhile, the MPC maintained the Liquidity Reserve Requirement (LRR) ratio on domestic and foreign deposits at 3.75 percent and the Lombard rate at 20 basis points above the Policy rate. In arriving at this decision, the Committee noted that headline inflation has been declining since January 2020 and the inflation outlook appears favourable. This decision is aimed at supporting economic recovery and job creation.

Global economic activity still subdued

Global economic activity remains subdued, but is slowly recovering from the impact of the COVID-19 pandemic. The International Monetary Fund’s (IMF) recent projections released in October 2020 indicate that the global economy will contract by 4.4 percent in 2020

compared to a contraction of 4.9 percent projected in June 2020. The revision reflects better-than-anticipated growth outcomes in the second quarter of 2020, especially in advanced economies. However, the resurgence in infections and the re-introduction of strict containment measures, particularly in Europe, pose a threat to the recovery process. Meanwhile, the Sub-Saharan Africa is projected to contract by 3.0 percent, lower than a contraction of 3.2 percent projected in June 2020.

International oil prices broadly stable

Brent crude oil prices averaged US$42.7 per barrel since July 2020. The IMF projections suggest that petroleum prices will average US$41.7 per barrel in 2020 and $46.7 per barrel in 2021.

Domestic economic growth remains low

Real GDP growth is projected at 1.2 percent in 2020 from 5.1 percent in 2019, reflecting adverse impact of the pandemic. The hard-hit sectors include manufacturing, tourism and accommodation, health services and wholesale and retail trade sectors.

Trade Balance continues to weaken

During the first nine months of 2020, trade deficit stood at US$1.5 billion, compared to a deficit of US$1.1 billion recorded in the corresponding period of 2019. Cumulatively, from January to September 2020, exports amounted to US$0.5 billion against imports of US$2.0 billion. Meanwhile, inward remittances, more particularly from South Africa, have picked up in recent months to US$52.5 million in the third quarter of 2020 from US$32.1 million in the second quarter of 2020, largely on account of easing lock-down restriction measures.

Inflation projection for 2020 revised downwards

Headline inflation has declined from a peak of 11.5 percent in January 2020 to 7.1 percent in September 2020, due to relatively lower food prices compared to 2019. Meanwhile, non-food inflation has been low and stable, anchored by relatively stable exchange rate and energy prices. Inflation is now projected to average 8.6 percent in 2020 from 9.8 percent projected during the Third MPC Meeting of 2020. In 2021, it is anticipated that inflation will continue to decline.

MPC reduces the Policy Rate by 150 basis points

The MPC observed that inflation is projected to average 8.6 percent in 2020 and is expected to decline further in 2021. The MPC, therefore, resolved to reduce the Policy rate to 12.0 percent. Meanwhile, the committee also resolved to maintain the LRR ratio on domestic and foreign deposits at 3.75 percent and the Lombard rate at 20 basis points above the policy rate. This decision is aimed at supporting economic recovery and job creation.”

www.CentralBankNews.info

Source: http://www.centralbanknews.info/2020/05/malawi-no-jul-jan.html

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