Mozambique's central bank left its benchmark standing facility rate at 23.25 percent, saying inflation is continuing to trend downward and may reach a projected 14 percent by the end of the year while economic growth will remain modest in coming months as the country continues to feel the impact of last year's suspension of foreign aid.
The Bank of Mozambique, which raised its rate 13.50 percentage points last year – including a sharp 600 basis point hike in October – said the decision to maintain its key rate was taken in light of domestic and international risks that could have a negative impact on inflation and the exchange rate if they were to materialize.
In that event, the central bank repeated its guidance from December, when it also kept the rate steady, that it remains vigilant and may take “necessary corrective measures” before the next scheduled meeting of its monetary policy committee on April 10.
As of April 15, interventions on the interbank money market to regulate liquidity will be made on the basis of a new benchmark interest rate that will be known as the monetary policy rate. The central bank said this new rate aims to strengthen the formation of market interest rates, make the process more transparent and follows international best practice.
Inflation rate hit a 2016-high of 26.35 percent in November but has decelerated in the last two months and hit 20.56 percent in January this year as the exchange rate of the metical has been stable this year following a plunge last year until the October rate hike.
Mozambique's economy has not only been hit hard by the fall in global commodity prices, such as coal, but was then dealt a severe blow when foreign donors, including the International Monetary Fund, withdrew funding after it was discovered the government had hidden almost US$1.4 billion of debt, the equivalent of 10 percent of its Gross Domestic Product in 2015.
The metical hit record lows of around 78.5 to the U.S. dollar in October last year but has firmed since then and was trading at 70.5 to the dollar today, up 1 percent since the start of this year but still down 32 percent since the start of 2016.
The central bank said the stability of the exchange rate and an improving economy had created space to resume a liberalization of payments abroad and it has now revoked the 700 metical limit on payments abroad with international bank cards that was imposed in January 2016.
Helped by an improvement in exports and a significant drop in imports, Mozambique's trade balance turned positive for the first time in more than 20 years in the fourth quarter of last year.
Preliminary data show that fourth quarter exports exceeded imports by US$18.2 million compared with imports that topped exports by $904 million in the same 2015 quarter.
This has also helped the central bank accumulate international reserves and since November it has bought $136 million in December and $25.4 million in January, increasing the accumulated total from November to January to $278 million.
This raised Net International Reserves to about US$1.798 billion in January, or the equivalent of about 5 months of imports. Among payments abroad, the central bank said the fuel bill amounted to $76 million in the same period and payments of foreign debt worth $21.5 million.
As expected, Mozambique's economy slowed sharply in the fourth quarter of last year, with GDP up by an annual 1.1 percent, down from 3.7 percent in the third quarter. This resulted in average growth of around 3.3 percent in 2016, down from 6.6 percent in 2015.
The central bank is forecasting growth of 5.5 percent this year and inflation of 14 percent.