Mozambique's central bank lowered its monetary policy rate, MIMO, by a further 50 basis points to 12.75 percent as inflation continues to decelerate while the outlook has become more favorable following last week's signing of a peace accord.
It is Bank of Mozambique's (BOM) second rate cut this year and the 11th since April 2017 as inflation has steadily fallen since topping 26 percent in November 2016 and the exchange rate of the metical has risen since hitting almost 80 to the U.S. dollar in October 2016.
"The decision to reduce the minimum rate is justified by the continued improvement in the medium-term inflation outlook, which consolidates the stability of this indicator at single-digit levels," BOM said.
BM also lowered its deposit rate by 50 basis points and the rate on its permanent lending facility to 9.75 percent and 15.75 percent, respectively. However, it left the reserve ratio of domestic currency deposits at 14.0 percent and foreign currency deposits at 36.0 percent.
The signing of the Peace and National Reconciliation Agreement on Aug. 6 between Mozambique's president and the leader of the main opposition group, paves the way for peaceful elections on Oct. 15 and ends violence that has persisted since a civil war ended in 1992 that has cost the lives of an estimated 1 million people.
BOM said the outlook for inflation had become more favorable following the peace agreement and the beginning of the disarmament and demobilization process, though uncertainties still justify a conservative stance that should help bring down the cost of financing.
Mozambique's inflation rate fell further to 2.16 percent in June and BOM said its forecast of stable domestic prices is still based on lower pressure in the foreign exchange market given that aggregate demand remains below potential and the favorable movement of oil prices.
As far as Mozambique's economy, the central bank said it expects activity to decelerate further this year but then gradually recover in 2020, albeit it would remain below its potential. Last month BOM said growth in the medium term would be stimulated by post-disaster reconstruction and the completion of natural gas projects.
Mozambique's gross domestic product grew an annual 2.5 percent in the first quarter of this year, down from 3.0 percent in the previous quarter while international reserves remain at a level that covers six months of imports, excluding large projects.
Gross international reserves rose by US$111 million since the June monetary policy meeting to $3.244 billion.
The exchange rate of Mozambique's metical has firmed sharply since late April this year after the country was hit by Tropical Cyclones Idai and Kenneth in March and April, which the International Monetary Fund estimated would dent economic growth this year from 3.3 percent last year.
In April the IMF approved $118 million in emergency assistance to Mozambique, with the death toll from the two cyclones estimated at more than 1,000 people.
The metical was trading at 60.49 to the U.S. dollar today, up 7 percent since late April and 1.8 percent since the start of this year.
