Mozambique: Bank of Mozambique Cuts Interest Rates

Maputo — The Monetary Policy Committee of the Bank of Mozambique, meeting on Wednesday, reduced the bank's key interest rates by 100 base points, with immediate effect.

Thus the Interbank Money Market Rate (MIMO), used by the central bank for its interventions on the interbank money market to regulate liquidity, falls from 14.25 to 13.25 per cent.

The Standing Lending Facility (the interest rate paid by the commercial banks to the central bank for money borrowed on the Interbank Money Market) falls from 17.25 to 16.25 per cent, while the Standing Deposit Facility (the rate paid by the central bank to the commercial banks on money they deposit with it) falls from 11.25 per cent to 10.25 per cent.

The compulsory reserves coefficient, the amount of money that the commercial banks must deposit with the Bank of Mozambique, remains unchanged, at 36 per cent for foreign currency, and 14 per cent for local currency.

The statement from the Monetary Policy Committee said the decision to reduce the MIMO rate, after holding it steady for the previous six months, "is justified because updated projections for inflation in the medium term point to a significant improvement in the prospects for this indictor, thus consolidating the goal of macro-economic stability".

The Central Bank attributed low inflation to "the recent evolution of prices, the current trajectory of the exchange rate, and the prospects for lower exchange pressure in the domestic market".

The annual rate of inflation had slowed down for the fourth consecutive month, the Committee noted. At the end of May annual inflation was 2.42 per cent, which compares with 3.26 per cent at the same time in 2018.

"This slowdown", the statement said, "reflects in part the gains of maintaining a prudent monetary policy together with the favourable evolution of the exchange rate of the metical against the currencies of major trading partners, the reduction in the prices of liquid fuels in April, and the increased supply of Mozambican agricultural produce".

The metical has been gradually appreciating against the US dollar. Since the last meeting of the Committee, it had improved from 64.63 meticais to the dollar on 24 April to 61.75 meticais to the dollar on 18 June. Over the same period the exchange rate against the South African currency improved from 4.6 to 4.18 meticais to the rand.

This appreciation of the value of the currency, the statement says, "partly reflects the improvement in the current account deficit in the first quarter of 2019, combined with the measures taken by the Bank of Mozambique to ensure greater discipline and transparency in exchange operations".

Mozambique's international reserves had increased since April by 86 million US dollars, and now stood at 3.134 billion dollars. This is enough to cover about six months worth of import of goods and services, excluding the transactions of the foreign investment mega-projects.

The Committee declared that it remains vigilant to the risks associated with projections of inflation. There was a fiscal risk arising from uncertainties about financing this year's general elections, and about when promised funds will be disbursed to mitigate the impact of this year's two major cyclones. At the same time, public revenue was declining because of the cyclones.

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