- Central bank has increased rate by 750 basis points this year
- Inflation has been climbing apace, rate rose to 19.7 in June
Mozambique’s central bank raised its key rate by 300 basis points to 17.25 percent, the fourth rate increase this year, as it tries to put a lid on soaring prices in the cash-strapped southern African nation.
Policy makers also increased the interest rate on the standing deposit facility to 10.25 percent from 7.25 percent, Governor Ernesto Gove told reporters in the capital, Maputo.
“We recognize these decisions are not favorable to businessmen but they are necessary,” Gove said. “These are sacrifices we need to make today.”
Building the country’s foreign exchange reserves should be the central bank’s primary objective as increasing rates won’t have much impact on reducing inflationary pressure, according to Hanns Spangenberg, a senior economist at NKC African Economics. Mozambique holds foreign reserves of $1.9 billion, enough to cover three months worth of imports, the governor said.
“It looks like they haven’t been scared to make big hikes in the last few months,” Spangenberg said by phone from Paarl, South Africa. “They’re doing all they can to curb inflationary pressure, but we don’t see it doing much. I don’t think you’ll see a drastic drop in inflation from such a hike because of the supply-side nature of inflation.”
While the central bank has raised the rate by a total 750 basis points since the start of the year, prices have kept rising, driven primarily by a weak currency. The inflation rate rose to 19.7 percent in June from 11.25 percent in January, according to the national statistics agency.
The Mozambican metical closed trading down 1.2 percent at 66.36 per dollar in Maputo. It has declined 28 percent against the dollar this year, making it the second-worst performing currency on the continent after Nigeria’s naira.
Mozambique is battling with debt after a commodity slump reduced its export revenue and a depreciation of the metical boosted its payment costs in dollars. The government in April owned up to the existence of $1.4 billion of previously undisclosed borrowing, including loans taken out by state-owned companies.