Mozambique: Central Bank maintains monetary policy interest rate

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  • The Monetary Policy Committee of the Bank of Mozambique (CPMO) has decided to keep its benchmark interest rate unchanged at 17.25 per cent.
  • This decision was based on the prevalence of high risks and uncertainties surrounding inflation forecasts.
  • Despite the uncertainties and risks, the CPMO remains optimistic that inflation will continue to fall in the medium term.  

The Monetary Policy Committee of the Bank of Mozambique (CPMO), meeting in Maputo on Wednesday, decided to keep its benchmark interest rate, the Monetary Policy Interest Rate (MIMO), unchanged at 17.25 per cent. This is the rate used by the central bank in its interventions on the interbank money market to regulate liquidity. The rate rose from 15.25 to 17.25 per cent last September.

In a press statement, the CPMO said the decision not to alter interest rates was due “to the prevalence of the high risks and uncertainties underlying the forecasts for inflation, notably the impact of the liquidity generated in the economy, resulting from the pressure on public expenditure, and the continued geopolitical tension in Europe”. This was despite the expectation that, in the medium term, annual inflation will return to less than ten per cent.

The MIMO is an important tool for the CPMO in managing monetary policy and ensuring stability in the economy. It is the rate at which the central bank lends to commercial banks and is used to influence the overall level of interest rates in the economy. The recent increase in the MIMO from 15.25 to 17.25 per cent last September was a measure taken by the CPMO to curb inflation and stabilize the economy. However, despite this increase, the CPMO has decided to keep the MIMO unchanged at 17.25 per cent.

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Let us simplify the importance of monetary policy interest rate to a country’s economy. Monetary policy interest rates can be used to control inflation and stabilize the economy. The central bank of a country, such as the Bank of Mozambique, sets monetary policy interest rates. If the interest rate is high, it makes borrowing money more expensive, which can slow down economic growth and curb inflation. If the interest rate is low, it makes borrowing money cheaper, which can encourage economic growth and potentially lead to inflation. In summary, monetary policy interest rates are an important tool that central banks use to manage the economy and keep it on a sustainable growth path.

The central bank of Mozambique left its key MIMO rate steady at 17.25% in the first monetary policy meeting of 2023. Policymakers said the decision takes into account upside risks and uncertainties related to inflation although it is expected to slow to single digit in the medium term. [Photo/ trading Economics]
The decision to keep the MIMO unchanged was based on the CPMO’s assessment of the current economic situation and the risks and uncertainties surrounding inflation forecasts. The CPMO cited the impact of the liquidity generated in the economy, resulting from the pressure on public expenditure, and the continued geopolitical tension in Europe as factors contributing to the prevalence of high risks and uncertainties. Despite these factors, the CPMO expects that annual inflation will return to less than ten per cent in the medium term.

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To further address the issues of inflationary pressures, the CPMO also ordered a sharp increase in the compulsory reserves that the commercial banks must deposit with the Bank of Mozambique. For local currency, the reserves rise from 10.5 to 28 per cent, and for foreign currency from 11.5 to 28.5 per cent. This increase in compulsory reserves is intended to absorb excessive liquidity in the banking system, which is generating inflationary pressures. By increasing the amount of money that commercial banks must keep on deposit with the central bank, the CPMO aims to curb the amount of money available in the economy and reduce inflationary pressures.

The CPMO acknowledged that there were great uncertainties about the impact of excessive liquidity on macro-economic indicators, and the effects of climate shocks on the supply and sale of produce. These uncertainties, combined with the ongoing geopolitical tensions in Europe and the potential for a global economic recession, make it difficult for the CPMO to predict the future inflation rate. Nonetheless, the CPMO was optimistic that Mozambique’s annual inflation will continue to fall. It fell from 10.62 per cent in November to 10.29 per cent in December, reflecting falling food prices and a cut in the price of cooking gas.

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Despite this positive trend, public debt remains high in Mozambique. In January, it reached 288.7 billion meticais (about 4.5 billion US dollars), 13.6 billion more than in December. This high level of public debt is a concern for the CPMO as it can put pressure on the economy and contribute to inflationary pressures.

The CPMO said it will “continue to monitor the risks and uncertainties associated with the inflation forecasts, and will not hesitate to take the corrective measures necessary” to maintain stability in the economy and keep inflation under control. This includes both keeping the MIMO unchanged and increasing the compulsory reserves for commercial banks. The CPMO’s decision to keep the MIMO unchanged, despite the high risks and uncertainties, is a clear indication of their commitment to maintaining stability in the economy and their willingness to take corrective measures as necessary.

It is important to note that while the increase in compulsory reserves may have a short-term impact on the availability of credit, it is a necessary measure to curb inflationary pressures and maintain stability in the economy. The CPMO’s decision to increase the reserves is also in line with their overall monetary policy objectives of ensuring price stability and supporting economic growth.

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Albert is a Chemical Technologist and Author. He is passionate about mining, stock market investing, Fintech and Edutech.

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