The central bank of Malawi raised its benchmark bank rate by 400 basis points to 25.0 percent in an "urgent need to stabilize the Kwacha and in order to anchor inflation expectations."
The Reserve Bank of Malawi added in a statement that the bank rate was now in line with developments in both non-food inflation and the Treasury bill yield, an important indicator of market expectations.
Malawi's central bank, which has now raised rates by 1200 basis points this year, said the risks to the financial system were heightened due to the deteriorating macroeconomic environment and some banks continued to face liquidity problems in October and relied on the central bank's discount window to make up for their liquidity shortfalls.
Foreign exchange reserves have also been falling since July and stood at USD142.7 million, or about 0.8 months of import cover, as of end-October. The central bank has been supporting the foreign exchange market through sales of USD258.4 million between May and October.
Malawi's inflation rate rose to 30.6 percent in October, up from 28.3 percent in September and up from 9.8 percent at the start of the year. Food price increases account for 83.4 percent of the increase in the inflation rate.
"Reflecting the decreasing foreign exchange reserves and the increasing inflationary expectations, the Kwacha continued to depreciate faster than anticipated," the Reserve Bank said.
The average Treasury bill yield rose to 22.0 percent from 21.34 percent, with the average yield on the 364 days tenor at 24.62 percent in October, way above the 21 percent policy rate, the bank said.