Fitch Solutions has projected that the Banco de Moçambique (BM) will lower its policy interbank rate by 100 basis points (bps) to 12.25 percent by the end of 2021.
In January 2021, Mozambique’s central bank hiked the policy rate by 300 basis points amid rising upside risks to inflation stemming from a trilogy of factors namely; downward pressure on the Mozambican metical, uncertainty surrounding the Covid-19 pandemic, and insecurity in the country’s gas-rich north.
“At Fitch Solutions, we expect that the Banco de Moçambique (BM) will keep its policy rate at 13.25% at its September monetary policy committee meeting, before cutting by 100 basis points to 12.25% in Q4 2021.”
Fitch Solutions
These notwithstanding, Fitch Solutions believes that stable price growth will offer room for monetary easing by the end of the year. Inflation has had quite a run in the first quarter of 2021, rising from 4.1 percent year-on-year in January to 5.8 percent and 5.5 percent in March and July respectively.
It is further anticipated that price pressures will remain under control, creating room to lower the policy rate. Fitch Solutions predicts that central bank will let the metical depreciate from the spot rate of MZN63.74/USD over the coming months.
This, Fitch Solutions explains as the case due to the fact that reduced concern about upside risks to inflation limits the central bank’s need to support the currency. That said, following the sharp revaluation of the metical by the central bank between February and mid-April 2021. This was also combined with higher coal and aluminium prices this year.
Inflation forecast for 2021
Fitch Solutions therefore forecasts that the currency will end 2021 at MZN71.00/USD, 5.2 percent stronger than at end-2020. As such, this will help to contain imported price pressures. As such, Fitch Solutions forecasts that inflation will slow down to 5.0 per cent by the end of the 2021. Meanwhile, weak economic conditions will also provide impetus for a rate cut, Fitch Solutions indicates.
“While we forecast that real GDP will expand by 2.8 percent in 2021, growth will be below the 2010-19 average of 5.5 percent, and below the Sub-Saharan African average of 3.1 percent.
“This is because of ongoing lockdown restrictions limiting consumer and business activity and headwinds from insecurity threatening the development of gas projects in the north of the country. Thus, in an attempt to support the economy’s recovery from the Covid-19 pandemic, we believe that the central bank will cut in Q4 2021.”
Fitch Solutions
Furthermore, Fitch Solutions believes that Mozambique’s real GDP will accelerate to 4.4 percent in 2022, boosting demand-pull pressures, and reducing the need for rate cuts.
Also, inflation will slow to an average of 4.8 percent in 2022 on the back of the metical strengthening, Fitch Solutions suggests. In addition, developed markets such as the US and EU will continue to keep interest rates low at 0.0 percent in 2022. Fitch Solutions believes that these two factors will reduce pressure on the central bank to hike next year.
