Malawi's Mbewe sees single digit inflation in 2007

SUN CITY, South Africa (Reuters) - Malawi's central bank Governor Victor Mbewe said on Tuesday inflation should stay in single digits during 2007 although higher oil prices posed the biggest threat.

"We expect that inflation will remain in the single digit in this year ... that is our target. At the moment the higher international oil price is the biggest threat to inflation," Mbewe told Reuters on the sidelines of a banking conference.

Mbewe added that the central bank was looking at "further reduction in interest rates" for the southern African country, but did not give further details.

Official data showed that Malawi's headline inflation slowed to 7.2 percent year-on-year in August, from 7.4 percent the previous month, with food inflation, which accounts for 58.1 of the Consumer Price Index (CPI), dipping to 6.6 percent from 6.7 percent.

Drought-prone Malawi has had a bumper maize crop this year, helping to lower the cost of the staple grain.

It had a surplus of 1.3 million metric tonnes of maize from the 2006/2007 cropping season, more than three times the surplus in the previous year.

"We had a drought (in the past) and this was a problem for inflation but we managed to bring it back to single digits about 6 months ago with certain interventions, such as irrigation schemes and subsidies for farmers," Mbewe said.

Economic analysts have, however, said rising fuel prices could increase Malawians' transport and farming costs, reversing the gains made on the inflation front.

The landlocked country has no oil refineries and is a net importer of fuel.

"The international oil price is our biggest concern because it will lead to higher prices. But as I said, the surplus maize will ease the pressure," Mbewe said on Tuesday.

He said Malawi's macroeconomic fundamentals have stabilised, and that the central bank was "comfortable" with the Malawian kwacha's exchange rate.

"We are looking at a further reduction in interest rates. We have cut them twice in the past year, but its difficult to discuss monetary policy further than that," Mbewe added.

The Reserve Bank of Malawi cut its bank rate to 17.5 percent from 20 percent in August, citing the improved outlook for inflation and other economic fundamentals.