Malawi's central bank slashed its policy rate by 400 basis points to 18.0 percent as the disinflationary momentum has strengthened, with the stabilization of the kwacha's exchange rate boding well for a continued decline in inflation.

The Reserve Bank of Malawi has now cut its policy rate by 600 basis points this year following a cut in March and by 900 basis points since embarking on an easing cycle in November 2016.

Malawi's inflation rate slowed for the 10th consecutive month in May to 12.3 percent from 14.6 percent in April, with food inflation dropping to 11.2 percent in May from 29.2 percent in July 2016 due to the improved supply of food.

"The outlook for inflation has improved significantly since the last MPC meeting, especially because the May data confirm that disinflationary momentum has strengthened," the Reserve Bank said.

In its monetary policy statement from last month, titled "Maintaining the declining path of inflation," the Reserve Bank forecast that inflation would continue to decline and reach 10.7 percent in June and 8.5 percent in December.

The kwacha has been relatively stable this year in contrast to the previous five years when it steadily depreciated. Today the kwacha was trading at 726 to the U.S. dollar, down 1.4 percent this year. Compared with the start of 2012, the kwacha is down 78 percent.

"Supported by low Kwacha liquidity and relatively subdued demand for foreign exchange, the exchange rate has been relatively stable during the past twelve months," the central bank said.

Helped by more favorable weather, the central bank forecast that Malawi's economy should grow 4.5 percent this year, up from 2.7 percent last year. However, the central bank also noted that continued economic recovery depends on macroeconomic stability and improving supply.