The dangers of cuts in policy rates

The Institute of Social and Economic Studies (IESE) says that the manipulation of interest rates by reducing policy rates, may have effects on inflation, but contributes nothing to the gross domestic product, creating new jobs and income per capita .In a study released this month, says IESE cut interest rates even if no "is the only mechanism to stabilize inflation." A harsh criticism to the Bank of Mozambique, which this year fell only twice the reference rates.The reduction of interest rates determined by the Central Bank, also called interest rates or reference - and determine the market interest rates - has no influence on consumption levels, and the situation can cause inflation (general rise in prices of goods and services). This observation is conveyed in a bulletin issued to "The Economic Country" by the Institute of Social and Economic Studies (IESE), led by Mozambican economist Carlos Nuno Castel-Branco."With a reduction in reference rates would be expected to occur an increase in levels of consumption due to increased ability to acquire goods and services.However, the effect can be inverted, if not created domestic conditions to meet this increased demand, and in this case, it is expected to happen a high increase in price and thus increased levels of inflation, which in fact contradicts the expectations of monetary policy in place, "says the document called the IESE Information Development, Institutions and Social Analysis (IDEA).For the IESE, the disturbed that the Central Bank has been made of the reference rates have no impact on Gross Domestic Product (GDP), employment levels, or quality of life."A monetary policy focused exclusively on the reduction and control of inflation, through the manipulation of reference interest rates, may have effects on inflation targets set, however, does not extend to the impact on GDP or employment levels and income per capita (variable that measures the social level of citizens), "says IESE in the document.However, the IESE warns that the main criticism that is surrounding this issue is "not about the definition of inflation targeting as a monetary policy objective, but rather on the sole and exclusive pursuit of inflation targeting using essentially the process manipulation of interest rates to achieve the main objective, as if this were the only mechanism capable of stabilizing the inflation rate. "In the document, it is argued that the Central Bank intervention in the manipulation of interest rates ignores other determinants of inflation such as the process of price formation and the different behavior in different sectors of the economy, dependence on imported staple products and the factors that dictate the prices of these products in Mozambique.Are essentially three interest rates that determine the reference price of money in the market, in particular, Standing Lending Facility, which corresponds to the interest that commercial banks pay the debt contract with the Bank of Mozambique; Standing Deposit Facility, the interest that the Bank of Mozambique paid to commercial banks for deposits of excess liquidity that they can carry with him (represents a burden for the Bank of Mozambique) and required reserves coefficient, the percentage of money that commercial banks must deposit daily at the Central Bank to prevent any clashes.Rising interest rates have been undertaken by the monetary authority to reduce inflation (rising prices of goods and services).The IESE explains that, in its decisions, the Bank of Mozambique does not take into account the speculation that is generated within the economic agents. It is that several agents have interpreted the reduction of interest rates as a therapy for the high cost of bank credit (interest rates), since it implies a reduction in the obligations of commercial banks to the Central Bank, allowing that there is greater availability of money in economy."However, it is necessary to consider the effect of speculation that is generated by economic agents, as becomes clear perception that there is an expectation that the market interest rates may change resulting from disturbed in interest rates, therefore the performance of inflation rates, "he warns.To justify this position, IESE explains that "over the past three years (2008-2011), inflation has been quite volatile, and in almost all periods corresponding to the beginning of each year, prices saw significant reductions .Against this background, it can be inferred that after the court festivities, where prices of products each year suffer a process of speculation and increased significantly to start the year, consumers are forced to make some restrictions on their baskets as result of the excesses that occurred in November and December last year. " "As a result of reduced demand, maintaining supply levels, there is a reduction in the price level," continues the document. Therefore, this price reduction might be caused by the behavior of consumers and not the best performance of production processes and supply.Moreover, it offers a scenario in which the index of consumer prices (the mechanism used to measure inflation) varies significantly over the months, "and this is due to the absence of strategies that go beyond the ideological control of programmed targets and strategies to analyze the processes that underlie the current rates of inflation. "