Mozambique May Delay Further Rate Increases Until 2017, BMI Saysby
Central bank raised policy rate by 300bps to 17.25% in July
Annual consumer inflation accelerated to 20.7% last month
Mozambique’s central bank will probably pause its tightening cycle for the remainder of 2016 and resume increases in the first quarter of next year, according to BMI Research.
The Monetary Policy Committee increased its policy rate by 300 basis points at the last meeting in July to 17.25 percent, seeking to rein in galloping inflation. Consumer prices rose by 20.7 percent in July from a year ago, while the metical has fallen 45 percent against the dollar over the past 12 months, making it Africa’s worst-performing currency in that period.
“Weak real GDP growth -- projected at just 4.1 percent in 2016 -- and the government’s substantially elevated external debt burden will provide sufficient deterrents for any further hikes before 2017,” BMI said, while forecasting inflation would be at 22.5 percent by the end of the year.
There is scope for further monetary-policy tightening in the first quarter of 2017 to counteract inflationary pressures and negative real interest rates, BMI said. Once economic recovery feeds through to the exchange rate and prices begin to stabilize, the central bank will have room to make several cuts and end 2017 with the benchmark rate at 16 percent, it said.
The metical has depreciated as foreign investment in crucial industries such as energy and infrastructure slows, with investors spooked by the government’s lack of transparency and lower commodity prices. The coal-producing southern African nation owned up in April to the existence of $1.4 billion of previously undisclosed borrowing, including loans taken out by state-owned companies.
“The central bank will be reluctant to add another headwind to economic activity,” according to BMI. “Furthermore, the government’s enormous external debt burden -- estimated at around 80 percent of GDP -- will add another deterrent, as increased borrowing costs at home would add even greater pressure to the government’s debt-servicing capacity.”