Mozambique's central bank cut its new benchmark monetary policy interest rate (MIMO) by 25 basis points to 21.50 percent, saying the continued decline in consumer prices reinforced its forecast that inflation would be lower by the end of this year amid higher food supply, moderate domestic demand, exchange rate stability and favorable commodity prices.
The Bank of Mozambique also lowered other key rates, such as the permanent liquidity facility rate, by 25 basis points to 22.50 percent and the permanent deposit facility by 25 points to 16.0 percent.
The central bank also cut the mandatory reserve ratio on local currency and foreign currency liabilities by 50 basis points to 15.0 percent starting from the new reporting period on Sept. 7.
Mozambique's central bank introduced its new benchmark interest rate on April 15 and set it at 21.75 percent. The same month the central bank cut its previous benchmark rate, the standing facility rate, by 50 basis points to 22.75 percent in the first change in rates since a 600 basis point rate hike in October 2016.
Mozambique's inflation rate eased to 16.2 percent in July from 18.1 percent in June but the central bank said the risks to inflation remain high, especially from the fiscal side and this imposed a prudence in the conduct of monetary policy.
"The level of domestic public indebtedness remains high and represents a risk factor for inflation projections," the central bank said, pointing to public revenues that are below expectations in the context of a suspension of external support to the budget and high domestic debt, which requires a more robust fiscal consolidation.
Mozambique's economy has been hit by several severe blows in recent years, leading to a sharp fall in the exchange rate of its metical currency.
On top of a decline in global commodity prices, including coal, the government hid almost US$1.4 billion of debt, the equivalent of 10 percent of its Gross Domestic Product. This led to foreign donors, including the International Monetary Fund, to withdrew funding to the country.
The metical hit record lows of around 78.5 to the U.S. dollar in October 2016 but has firmed since then, helped by central bank rate hikes and rising commodity prices.
Today the metical was trading at 61 to the dollar, up 16.7 percent this year, as there are also signs of an improving economy.
The economic climate index rose for the third consecutive month in June, reflecting increased optimism among businesses regarding future demand and employment. And while this backs up expectations for a recovery in the economy this year, output remains below potential, the bank said.
Last month the IMF forecast that Mozambique's economy would grow by up to 4.7 percent this year, up from 3.8 percent in 2016, due to a surge in coal production and exports.
In addition to welcoming the central bank's introduction of a new monetary policy regime centered around its MIMO rate, the IMF said the October 2016 rate hike had helped push down inflation from a peak of 26 percent in November 2016 despite a large rise in fuel prices in March, rebalanced the foreign exchange market and therefore helped the metical appreciate by some 30 percent since September 2016.
Mozambique's international reserves rose to US$2.446 billion as of Aug. 9 from $2.290 billion in May, a level that is sufficient to cover 6.1 months of imports, excluding large projects.
