16 February 2016

Mozambique: Bank of Mozambique Raises Interest Rates Again

Maputo — The Bank of Mozambique has once again increased its key interest rates in its struggle to bring down inflation.

A statement issued by the Bank's Monetary Policy Committee on Monday, after its monthly meeting, announced an increase of 100 base points in the Standing Lending Facility (the interest rate paid by the commercial banks to the central bank for money borrowed on the Interbank Money Market). This rate thus rises from 9.75 to 10.75 per cent.

This is the highest interest the Bank of Mozambique has charged since September 2012. The rate then fell gradually, reaching 7.5 per cent in November 2014. It remained at that level for a year, but three rate rises in October, November and December 2015 brought it back up to 9.75 per cent. That rate held in January, but now the upward trend has resumed.

The Standing Deposit Facility (the rate paid by the central bank to the commercial banks on money they deposit with it) rises by 50 base points, from 3.75 to 4.25 per cent. The Compulsory Reserves Coefficient - the amount of money that the commercial banks must deposit with the Bank of Mozambique - remains unchanged at 10.5 per cent.

The Monetary Policy Committee said it has increased the interest rates because of “the probable impacts of the adverse international conjuncture, as well as the expected effects of drought in the south and centre of the country and floods in the north”. In addition, the Mozambican Gross Domestic Product was growing at less than the initial forecast, while “projections for domestic inflation show the prevalence of pressure in the short and medium terms”.

Figure from the National Statistics Institute (INE), based on the consumer prices indices for the three largest cities (Maputo, Nampula and Beira), showed an inflation rate for January of 2.48 per cent, following inflation of 4.76 per cent in December. Inflation for the year 1 February 2015 to 31 January 2016 was 11.25 per cent.

The Mozambican currency, the metical, after sharp depreciation in late 2015, showed signs of stabilizing in January. On the last day of January, the metical was quoted at 46.06 to the US dollar on the Inter-Bank Exchange Market, a depreciation of 2.47 per cent over the month, and an annual devaluation of 42.25 per cent.

In the commercial banks the average rate cited at the end of the month was 47.65 meticais to the dollar a monthly devaluation of only 0.74 per cent.

The metical was doing much better against the South African rand, the currency in which most food imports are denominated. At the end of the month there were 2.88 meticais to the rand, the same as in late December. The annual depreciation of the metical against the rand slowed down to 4.35 per cent.

Provisional figures show that the country's net international reserves fell by 124.5 million US dollars to 1.869 billion dollars. The reserves are enough to cover 3.1 months of imports of goods and non-factor services, when the operations of the foreign exchange mega-projects are excluded.

The Monetary Policy Committee also decided that the central bank will intervene in the inter-bank markets to ensure that, by the end of February, the monetary base does not exceed 68.163 billion meticais.

The monetary base shrank by 2.533 billion meticais in January to 71.179 billion, rather higher than the ceiling fixed by the Committee of 70.211 billion meticais. Over the past year the monetary base has increased by 25.6 per cent.

The continued fall in commodity prices has hit key Mozambican exports. The Committee's statement said that, over the past year, the prices of aluminium had fallen by 18.5 per cent, thermal coal by 16.5 per cent, natural gas by 13.5 per cent, and sugar by 11.6 per cent.

On the other hand, Mozambique's bill for imported liquid fuels has fallen sharply because of the collapse in the oil price. The price of the benchmark Brent crude fell by 34.2 per cent over the year, and is continuing to fall. A barrel of Brent crude was quoted at 34.4 dollars at he end of January, and fell to 33.36 dollars on 12 February.

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