BM cuts interest rates

The Bank of Mozambique decided yesterday to reduce the monetary policy interest rate, MIMO rate, by 25 basis points to 21.50 percent. In addition, the Central Bank’s Monetary Policy Committee (CPMO) reduced the rates of the Permanent Lending Facility (FPC) and the Permanent Absorption Facility (FPD) by 25 basis points to 22.50 percent and 16.0 percent respectively, and reduced the Mandatory Reserves (RO) ratio for liabilities in local and foreign currency by 50 basis points to 15.0 percent. The central bank hopes the measure will reduce interest rates charged by commercial banks, long considered unaffordable by the private sector and households alike.

The metical appreciated from 61.43 meticais to the US dollar on 19 June to 60.35 on 9 August. The South African Rand was quoted at 4.63 meticais, on the same date, as against 4.71 meticais on June 19. This recent metical trend, together with the reduction of inflation, has helped halt the losses of external competitiveness that the Mozambican economy had been experiencing.

According to data from the central bank, liquidity in the money market is excessive, reflecting the purchases of foreign currency by the Bank of Mozambique at the initiative of commercial banks in an environment where credit to the private sector has remained stagnant. Between June and August 9, the central bank bought US$347.7 million from commercial banks, increasing the balance of Treasury bonds of different maturities to 82,177 million meticais against 70,306 million on June 30.

Meanwhile, monetary accounts show that as of June 2017, bank credit to the private sector has decreased by one percent in annual terms, maintaining the trend that has been observed since October 2016. The Bank of Mozambique’s international reserves continue to strengthen. By August 9, the central bank had sold US$264 million in the Interbank Foreign Exchange Market, destined to contribute to the liquid fuels import bill. In that period, it bought a total of US$812.7 million, leading the balance of gross international reserves to increase to US$2,446 million, sufficient to cover 6.1 months of imports, excluding large projects transactions. Provisional trade balance figures indicate a substantial improvement, with exports increasing by US$673.2 million in the first half of 2017. Large projects targeting the external market, especially in the areas of mining and aluminum production, accounted for the largest share. Meanwhile, imports increased by only US$20 million.

The Bank of Mozambique states that the risks of inflation demands prudence in monetary policy.“The level of domestic public indebtedness remains high and represents a risk factor for inflation projections. The collection of public revenues below expectations, in a context of suspension of external support to the budget and high internal indebtedness (97.7 billion meticais), requires a more robust fiscal consolidation,” the Bank of Mozambique reads. From the Bank of Mozambique’s perspective, other risk factors to be taken into account are extreme weather, commodity price volatility and the political environment in neighbouring countries, particularly in South Africa, which could impact on the desired trajectory of prices of diverse goods and services if certain scenarios were to occur.