Mozambique's central bank left its benchmark standing lending facility interest rate at 23.25 percent, saying the exchange rate and other indicators have begun to evolve in the expected direction and this should pave the way for lower inflation in the short and medium term.
However, the Bank of Mozambique, which has raised its rate by 13.50 percentage points this year to curb inflation, also said that it may take "necessary corrective measures" before the next scheduled meeting of its monetary policy committee on Feb. 14, 2017 if risks to inflation materialize.
Mozambique's inflation rate accelerated to a 2016-high of 26.83 percent in November from 25.53 percent in October while the exchange rate has been firming since the central bank in October raised the rate by 600 basis points and the reserve requirement for metical deposits by 250 points.
Late on Friday Oct. 21 the central bank tightened its policy stance, with the metical immediately firming from a record low of 78.5 to the U.S. dollar. Today the metical was trading at 72.5 to the dollar, up 8.3 percent since Oct. 21 but down 33.8 percent this year.
The International Monetary Fund has described the rate hike as "courageous" albeit rather late and therefore tougher than if the central bank had acted earlier. However, this delay was likely due to the appointment of a new governor with three months in between monetary policy committee meetings.
The central bank said recent data indicate that Gross Domestic Product this year will grow around 3.5 percent while inflation will be lower than around 30 percent that it had expected.
The rise in November inflation was mainly due to an increase in regulated prices, including at 37 percent hike in electricity and an 11 percent rise in water prices, while there continues to be a shortage of fresh produce supply of fresh produce due to military instability in parts of the country and adverse weather.
These factors are also behind a continued slowdown in the economy, with Gross Domestic Product in the first nine months slowing to 4.0 percent from 6.8 percent in the same 2015 period.
But the central bank said the recovery of global raw materials prices has had a positive impact on the growth prospect of exports and the country's current account deficit, which narrowed by 29.3 percent in the third quarter.
After five consecutive quarter of decline, Mozambique's exports rose in the third quarter compared to the same 2015 period while imports continued to drop due to a deceleration of economic activity and the impact of the metical's depreciation.
The reduced pressure on the current account has also eased pressure on Mozambique's foreign reserves which rose to US$1.754 billion as of Dec. 13 - or 3.5 months of imports - from $1.6928 billion, or 2.4 months of imports, in late September.
Since November the central bank said it had bought US$174 million foreign currency in the interbank market.
Mozambique's economy has been hit by the fall in global commodity prices, such as coal, and its finances worsened sharply when foreign donors, including the IMF withdrew funding when it was discovered that the country's government had hidden almost $1.4 billion of debt, or 10.6 percent of 2015 GDP.
