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Malawi's central bank cut its Liquidity Reserve Requirement (LRR) and its Lombard rate to immediately boost liquidity in in the banking system and lower the cost of funds to give commercial banks an incentive to support those economic sectors that are hit by the COVID-19 pandemic.

At a meeting by the the Reserve Bank of Malawi's (RBM) monetary policy committee advanced to April 1 from latest 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.

 

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