Mozambique slashes rates to 13.25%

Mozambique’s central bank cut its policy rate by 100 basis points to 13.25%, it announced on June 19, citing four consecutive months of falling inflation.

This is the Bank of Mozambique’s first rate cut in 2019, but it has cut policy rates by 1,000bp since April 2017. Mozambique saw a sharp spike in inflation that reached 26% in November 2016. But has since declined, reaching 2.4% last month from 2.2% in April.

The central bank’s statement said the drivers of falling inflation had included “prudent monetary policy” as well as a “favourable evolution” of the exchange rate against the currencies of Mozambique’s major trading partners. It said a fall in liquid fuel prices last April, and the increased supply of agricultural products, had also pushed inflation down.

But the central bank noted that Mozambique’s economy has slowed, growing 2.5% in the first quarter of 2019 compared with 3.7% in the same period of 2018. It also cautioned that further reductions in growth may be approaching.

“The risks of a slowdown in world economic growth remain due to the intensification of trade and geopolitical tension among the main economies, with likely impacts on external trade flows and commodity price volatility, of oil,” the central bank stated.

Mozambique was severely affected by the tropical cyclones Idai and Kenneth in March and April of this year, leading to more than 1,000 fatalities. The damage from the two cyclones has caused the International Monetary Fund to lower its forecasts of economic growth for the country, from 3.3% in 2019 to just 1.8%.

The IMF approved a $118 million loan to Mozambique in April to assist with recovering from the cyclones. IMF deputy managing director Tao Zhang said in a statement: “While the authorities cautiously proceed with normalisation of monetary policy, they should remain vigilant about possible second-round effects on inflation of supply shock caused by the cyclone.” The IMF predicts the country’s inflation rate could rise to as high as 8.5% by the end of the year as a result.

The central bank also decided to reduce the permanent deposit facility and permanent lending facility rates by 100bp to 10.25% and 16.25%, respectively.