At a meeting by the the Reserve Bank of Malawi's (RBM) monetary policy committee advanced to April 1 from later this month, the central bank cut LRR on domestic currency deposits by 125 basis points to 3.75 percent, immediately releasing liquidity of about 12 billion kwacha.
The Lombard rate was cut 50 percent to 20 basis points above the policy rate, lowering the cost of accessing funds from the RBM.
The policy rate was maintained at 13.5 percent "to mitigate against potential upward risks from the pandemic while monitoring developments as they evolve and act as and when necessary," RBM said.
RBM last cut its policy rate in May 2019 but has lowered its rate by 13.50 percentage points since November 2016 when the rate was twice the current level at 27 percent due to easing inflation.
The Reserve Bank raised it rate sharply in 2012 to curb inflation that soared to 38 percent in February 2013 and then raised it further in 2015 as drought pushed up food prices.
Malawi's kwacha had fallen sharply beginning in May 2012, hit by a combination of aid suspension by the U.K. and other donors such as the International Monetary Fund, in response to poor governance, and a sharp fall in the exports of tobacco due to Europe's debt crises.
But after depreciating some 75 percent in the four years from May 2012 to May 2016, the kwacha has been more stable and was trading around 736 to the U.S. dollar today, unchanged this year
Better weather in recent years has led to improved food production and Malawi's inflation rate eased to 11.0 percent in February from 11.1 percent in January and 11.5 percent at the end of 2019.
RBM forecast inflation to end this year at 9.3 percent as food prices continue to decline from an improved maize harvest, with continued exchange rate stability and lower oil prices helping contain non-food inflation.
"However, uncertainties surrounding the evolution of the COVID-19 pandemic is the key upward risk," RBM said, confirming its inflation target of 5.0 percent, plus/minus 2 percentage points.
A strong harvest helped boost economic growth to 5.0 percent in 2019 from 4.0 percent in 2018 but the path of growth this year will depend on the impact of the virus, the bank said, adding it still expects growth in the medium term to rise to 6-7 percent, supported by an infrastructure that is more resilient to shocks from climate change, improved access to financing, crop diversification and an improved business climate.
The Reserve Bank of Malawi issued the following statement:
"Monetary Policy Committee Reduces LRR and Lombard Rate
In view of the Coronavirus (Covid-19) pandemic, the Monetary Policy Committee (MPC) decided to advance its meeting scheduled for 29th and 30th April 2020. The Committee met on 1st April 2020, and decided to cut the Liquidity Reserve Requirement (LRR) on domestic currency deposits by 125 basis points to 3.75 percent; reduce the Lombard Rate by 50 percent to 0.2 percentage points above the Policy Rate; and maintain the Policy Rate at 13.5 percent. In arriving at this decision, the Committee considered macroeconomic risks emanating from the Covid-19 pandemic and sought to mitigate potential liquidity challenges that might ensue in the banking system.
Global growth marked down
Global economic growth for 2020 has been revised downwards to 2.4 percent, from an earlier projection of 2.9 percent. The downward revision reflects the slowdown in global economic activity following the coronavirus pandemic. In 2021, global growth is projected to rebound to 3.3 percent with the recovery from the Coronavirus pandemic.
In view of the Coronavirus (Covid-19) pandemic, the Monetary Policy Committee (MPC) decided to advance its meeting scheduled for 29th and 30th April 2020. The Committee met on 1st April 2020, and decided to cut the Liquidity Reserve Requirement (LRR) on domestic currency deposits by 125 basis points to 3.75 percent; reduce the Lombard Rate by 50 percent to 0.2 percentage points above the Policy Rate; and maintain the Policy Rate at 13.5 percent. In arriving at this decision, the Committee considered macroeconomic risks emanating from the Covid-19 pandemic and sought to mitigate potential liquidity challenges that might ensue in the banking system.
Global growth marked down
Global economic growth for 2020 has been revised downwards to 2.4 percent, from an earlier projection of 2.9 percent. The downward revision reflects the slowdown in global economic activity following the coronavirus pandemic. In 2021, global growth is projected to rebound to 3.3 percent with the recovery from the Coronavirus pandemic.
Domestic economic growth to strengthen to 6-7 percent in the medium-term
The recent strong agricultural harvests have boosted growth, but the growth path for the remainder of the year will depend on the impact of COVID-19 on the rest of the sectors following the disruption of global and regional economic links. This notwithstanding, economic growth may rise further to 6-7 percent in the medium term, backed by infrastructure that is more resilient to shocks from climate change, improved access to finance, crop diversification, and an improved business climate.
Medium-term inflation objective remains 5±2 percent
Headline inflation decelerated by 0.5 percentage points to 11.0 percent in February 2020 from 11.5 percent in December 2019. The outturn reflects weakening food prices. Non-food inflation remained low and stood at 5.4 percent in February 2020.
Inflation at the end of year 2020 is projected at 9.3 percent from 11.5 percent at the end of 2019. Food inflation is projected to continue declining in the near term, owing to improved maize harvest. The continued exchange rate stability together with the decline in global oil prices will assist to contain non-food inflation. However, uncertainties surrounding the evolution of the COVID-19 pandemic is the key upward risk. This notwithstanding, RBM remains committed to the 5±2 percent inflation objective in the medium term.
Exchange rate projected to remain stable in 2020
The kwacha traded at K741.01 per United States dollar as at end March 2020 and is projected to remain broadly stable in the year. The stability of the kwacha will be anchored by adequate foreign exchange reserves, supported by impending opening of the agriculture marketing season.
The recent strong agricultural harvests have boosted growth, but the growth path for the remainder of the year will depend on the impact of COVID-19 on the rest of the sectors following the disruption of global and regional economic links. This notwithstanding, economic growth may rise further to 6-7 percent in the medium term, backed by infrastructure that is more resilient to shocks from climate change, improved access to finance, crop diversification, and an improved business climate.
Medium-term inflation objective remains 5±2 percent
Headline inflation decelerated by 0.5 percentage points to 11.0 percent in February 2020 from 11.5 percent in December 2019. The outturn reflects weakening food prices. Non-food inflation remained low and stood at 5.4 percent in February 2020.
Inflation at the end of year 2020 is projected at 9.3 percent from 11.5 percent at the end of 2019. Food inflation is projected to continue declining in the near term, owing to improved maize harvest. The continued exchange rate stability together with the decline in global oil prices will assist to contain non-food inflation. However, uncertainties surrounding the evolution of the COVID-19 pandemic is the key upward risk. This notwithstanding, RBM remains committed to the 5±2 percent inflation objective in the medium term.
Exchange rate projected to remain stable in 2020
The kwacha traded at K741.01 per United States dollar as at end March 2020 and is projected to remain broadly stable in the year. The stability of the kwacha will be anchored by adequate foreign exchange reserves, supported by impending opening of the agriculture marketing season.
Oil prices decline to lowest levels in 18 years
Brent crude oil prices dropped to US$22.40 per barrel at the end of March 2020 from an average of US$60.20 per barrel registered in 2019. The decline in prices is on account of reduced demand following a slack in global economic activity amidst the Covid-19 outbreak as well as the price war between Saudi Arabia and Russia.
Private sector credit continues to expand
Private sector credit continued to increase and recorded a year-on-year growth of 24.4 percent in February 2020. The expansion was supported by relatively lower interest rates and prevailing macroeconomic stability. Going forward, the unfolding COVID-19 will likely lead to tightening of liquidity conditions in the banking system.
MPC cuts LRR on domestic currency deposits; Lombard Rate; but maintains the Policy Rate and LRR on foreign currency depositsThe Committee resolved to cut the Liquidity Reserve Requirement (LRR) on domestic deposits by 125 basis points to 3.75 percent from 5.0 percent. This reduction will immediately release primary liquidity of about K12 billion uniformly across the banking system in proportion to liabilities of the banks. The MPC further resolved to reduce the Lombard Rate by 50 percent to 0.2 percentage points above the Policy Rate. This will reduce the cost of accessing funds from the Central Bank and therefore will enable commercial banks to pass on the benefits to borrowers. These decisions were deemed necessary to ease banking system liquidity constraints and incentivise commercial banks to adequately support the sectors that are hit by the COVID-19 pandemic.
Brent crude oil prices dropped to US$22.40 per barrel at the end of March 2020 from an average of US$60.20 per barrel registered in 2019. The decline in prices is on account of reduced demand following a slack in global economic activity amidst the Covid-19 outbreak as well as the price war between Saudi Arabia and Russia.
Private sector credit continues to expand
Private sector credit continued to increase and recorded a year-on-year growth of 24.4 percent in February 2020. The expansion was supported by relatively lower interest rates and prevailing macroeconomic stability. Going forward, the unfolding COVID-19 will likely lead to tightening of liquidity conditions in the banking system.
MPC cuts LRR on domestic currency deposits; Lombard Rate; but maintains the Policy Rate and LRR on foreign currency depositsThe Committee resolved to cut the Liquidity Reserve Requirement (LRR) on domestic deposits by 125 basis points to 3.75 percent from 5.0 percent. This reduction will immediately release primary liquidity of about K12 billion uniformly across the banking system in proportion to liabilities of the banks. The MPC further resolved to reduce the Lombard Rate by 50 percent to 0.2 percentage points above the Policy Rate. This will reduce the cost of accessing funds from the Central Bank and therefore will enable commercial banks to pass on the benefits to borrowers. These decisions were deemed necessary to ease banking system liquidity constraints and incentivise commercial banks to adequately support the sectors that are hit by the COVID-19 pandemic.
The MPC however, decided to maintain the Policy Rate at 13.5 percent to mitigate against potential upward risks from the pandemic while monitoring developments as they evolve and act as and when necessary."
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