Mozambique’s central bank became the first in Africa this year to reduce its benchmark lending rate for a fourth time, lining up with advice from the International Monetary Fund and signaling the cuts will continue.
The bank lowered its policy rate, known by the Portuguese acronym Mimo, by 75 basis points to 14.25%, Governor Rogerio Zandamela told reporters in the capital, Maputo, on Wednesday. Policymakers expect to continue easing monetary policy, he said.
The move makes the liquefied-natural-gas producer an outlier among African central banks. Only five others have lowered rates this year, with the rest either raising or standing pat because of inflation concerns.
The cut should also help support Mozambique’s economic growth, which slowed to an annual 3.2% in the first quarter from 4.8% in the prior three months.
The IMF said earlier this month that further policy rate cuts were warranted in Mozambique.
“There is a risk that financial conditions remain too tight for too long,” the Washington-based lender said. “Based on cyclical conditions, the Banco de Moçambique has ample scope for further policy rate cuts.”
Even if the central bank lowers the Mimo rate by 75 basis points at each meeting this year and next, inflation would still remain at 4% or below, the fund said.
Consumer price growth has averaged 3.4% so far this year and the MPC sees it remaining in single digits for the medium term, Zandamela said. Still, a severe regional drought that’s impacted parts of Mozambique may pose upside risks.
The Banco de Moçambique, however, went against the IMF’s advice by keeping reserve requirements steady at a minimum 39% — an unusually high level that’s helped keep the currency stable, but may be crimping growth.
The fund has suggested that the Banco de Moçambique should refrain from using reserve requirements as an active policy tool. Earlier this month, it said that the increases in reserve requirements for lenders last year “may have been larger than needed to absorb excess liquidity.”
Zandamela differed, saying the central bank uses the reserves to reduce liquidity, which was at an acceptable level by the central bank’s assessment.
“We want liquidity that is in line with our prospects of having, and continuing to have, low and stable inflation,” he said. “In this regard, we are comfortable.”
Separately, Zandamela said the nation’s victory earlier this week in a London High Court case against a shipbuilding group called Privinvest would lead to lower borrowing costs for the government. The attorney general’s office said the nation expected to receive about $1.9 billion based on the judgment.
Privinvest plans on appealing.
Bloomberg
