At the end of last January, the Bank of Mozambique (BoM) surprised the market with the decision to raise the main reference rates by 300 basis points (bp), changing the monetary policy strategy that had been implemented since mid-2017.
Going back a few years, since late 2016, the BoM has been implementing a number of changes and reforms, with the aim of modernizing the monetary policy instruments used to achieve its primary objectives of preserving the value of the national currency and controlling inflation.
As part of these reforms, a monetary policy interest rate (MIMO) was adopted in April 2017, which serves as a benchmark for lending in the interbank market. The introduction of the MIMO, in addition to clearly signaling the Central Bank’s monetary policy to the market, also promotes greater transparency in the process of setting market interest rates.
The MIMO was “born” at 21,75% and since then, with the stabilization of the exchange rate, the BdM has been reducing this rate in a progressive and controlled way, following the drop in inflation, and thus contributing to the efforts to resume the country’s economic growth.
This downward trend of the MIMO reached its lowest level in June 2020, following the measures taken to combat the effects of the pandemic, with the CPMO reducing this rate by 150 bp in April and 100 bp in June, from 12.75% to 10.25%.
the Bank of Mozambique became the first central bank in the world to raise interest rates since the outbreak of the pandemic
The year 2020 will certainly remain in everyone’s memory. At that time, roughly two years ago, Mozambique was hit by one of the biggest natural disasters to have occurred recently in Africa, and, at a time when the country was preparing for an economic upturn, the real consequences of a pandemic that quickly spread around the world began to be known.
The severe and widespread slowdown in economic activity as a consequence of the containment measures to mitigate the spread of the Covid-19 pandemic led to the adoption of expansionary monetary policies by virtually all central banks globally, either through cuts in their key interest rates or through direct interventions in the capital markets.
These measures were accompanied by stimulus packages and fiscal relief by the governments, with the aim of ensuring the survival of companies and jobs, and stimulating economies that were beginning to enter deep recessions. Mozambique was no exception, and the Bank of Mozambique opted to cut its reference interest rates, creating a monetary stimulus and trying to avoid the deterioration of the conditions of the financial system…
However, these measures had some collateral impacts, of note being the evolution of the Metical, which closed 2020 with strong devaluations against major international currencies. In effect, this movement was similar to that of other emerging economies, motivated by the decline in demand and in the price of commodities, and the additional effect in Mozambique of reduced inflows of foreign exchange resulting from a lower flow of foreign investment.
This significant devaluation of the national currency, mainly in the second half of last year, was quickly reflected in a tendency for prices to rise, especially for imported goods. According to the INE, the year-on-year inflation, in February, has already reached 5.1%, with the prices of food and non-alcoholic beverages showing a year-on-year variation of 11.5%.
With this sequence of events, and seeking to mitigate the adverse effects of the devaluation on prices, as well as to safeguard against the risks and uncertainties associated with the spread of the pandemic, natural disasters and military instability in the north of the country, the Bank of Mozambique took a bold decision to raise interest rates.
With this decision, the Bank of Mozambique became the first central bank in the world to raise interest rates since the outbreak of the pandemic. This measure, together with a flexible management of international reserves, had an almost immediate impact on the Metical, which is beginning to show signs of recovery against major international currencies.
It is expected that the Central Bank will maintain a restrictive stance, keeping rates at current levels, but may also decide to raise rates further, if necessary, in order to control and achieve inflation targets.
