Malawi's central bank held its bank rate steady at 25.0 percent, the world's highest policy rate, "to sustain the tight monetary policy stance against the backdrop of emerging risks to inflation."
The Reserve Bank of Malawi (RBM), which raised rates by 12 percentage points last year to combat inflation, said the stability of the financial system had improved following a deceleration in inflation and the recent stability in the exchange rate but risks remain due to continuing high interest rates, which calls for tighter supervisory oversight.
Malawi's inflation rate eased to 23.3 percent in August from 25.2 percent the previous month, the seventh month in a row with a slower rate since after hitting a recent high of 37.9 percent in February. The RBM said the fall in inflation was due to a sharp slowdown in food prices and an appreciation of the kwacha currency.
"Looking ahead, inflation is expected to be higher than earlier forecast as prices of food, fuel and utility tariffs pick up," the central bank said.
Malawi's kwacha fell from the start of the year through late May, then rose sharply but has declined in recent weeks. Today it was trading at 366 to the U.S. dollar, down some 11 percent from 324 at the end of 2012.
Liquidity in Malawi's money market has risen substantially due the central bank's intervention to build up reserves and recent government borrowing, the bank said, with the average Treasury yield dropping to 19.37 percent in August from 45 percent in March.
"To contain the inflationary impact of this liquidity, the Committee underlined the need for intensified monetary operations," the central bank said.
Credit to the private sector has been declining, reflecting the tight monetary policy stance needed to stabilise the exchange rate and bring down inflation, the bank said, adding the annual growth in gross credit fell to 8.5 percent in August from 29.9 percent in August 2012.
Malawi's economy this year is still estimated to expand by 5.0 percent, up from 1.9 percent in 2012.
Malawi's gross official reserves remained at US44.6 million in August, the equivalent of 2.4 months of imports due to higher-than-expected proceeds from the tobacco auction and going forward reserves are expect to remain above two months of imports, the bank said.