Morocco Holds Key Interest Rate as Easing Proves Not So Easy
Wage and Tax Breathers Are Likely to Delay a Moroccan Rate Cut
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Morocco’s central bank held its benchmark rate steady Tuesday, refusing to budge even as the country’s economic prospects took a turn for the worse.
The decision, which Bank Al-Maghrib said was linked to bullish inflation projections and monetary conditions, came even as the government presses ahead with measures that will inject billions of dirhams into the economy -- steps that also are impeding an easing.
The bank’s board said that “inflation was low during the first four months of the year, with year-on-year decreases in the consumer price index by 0.1% on average.” That should keep annual inflation at 0.6% in 2019, before it’s expected to accelerate to 1.2% in 2020.
Inflation has been a key concern for the North African kingdom that’s the region’s largest energy importer. The challenge is amplified by the broadest wage hike since 2011 that’s set to kick in fully next month.
“On paper, Bank Al-Maghrib should cut the rate,” Abdelouahed El-Jai, a former central bank director and now an economist at Rabat-based think-tank Cerab, said before the decision. “But it shouldn’t be done after the government took steps that will boost demand. The central bank will want to see the effects of these measures on inflation before considering a rate move, probably in six to 12 months.”
The central bank hasn’t cut interest rates since 2016 despite taking an increasingly negative view of the country’s $115 billion economy, slashing this year’s projections for growth and inflation. Stimulus has instead come from the government, which will raise VAT repayments for private firms to the tune of 1.1% of gross domestic product this year from 0.7% in 2018.
On the western fringe of the Arab world, Morocco has managed to weather the unrest that has roiled other parts of the region, but the relative stability it’s enjoyed since 2011 is under threat from protests over jobs, poverty and human rights. The state’s reform efforts have recently pushed tens of thousands of teachers and medical school students to rally against what they see as a drive to privatize a costly public system.
Economic growth has remained too weak to generate enough jobs, while inflation is running below the central bank’s forecasts, having touched negative territory twice already this year. Lending also continues to be depressed as a result of a slowdown in the real estate industry, lower private investment and tighter regulations.
| What Our Economists Say... |
“With inflation and growth posting lower than expected performances, chances for a rate cut have increased. The repayment of VAT credit arrears can be likened to a fiscal stimulus that does not impact the government’s commitment to budget deficit reduction.” --Mark Bohlund, Africa economist |
All the same, the central bank’s pause is warranted because of a projected upswing in inflation during the second half fueled by higher domestic demand, some improvement in the fiscal and external balance and a drop in market rates this year, according to Nasreddine Lazrak, chief economist at Banque Centrale Populaire.
The proceeds of a privatization deal that will start to trickle in this month and a bond sale of at least $1 billion announced by the government for 2019 are also expected to ease pressure on liquidity in the second half of this year.
“Financing conditions remain satisfactory overall,” Lazrak said by email. “The central bank covers the entire liquidity needs of Moroccan banks and interbank rates are close to the key rate.”
The looming pay raise may also not provide much of a price boost. Under an agreement reached in April, a 10% increase in the private-sector minimum wage will be delivered over two years starting July.
The hike is expected to boost “demand for domestic goods and social peace,” said Rachid Aourraz, an economist and founding member of the Moroccan Institute for Policy Analysis. “But it’s not the sort of wage hike that will see people put some money on the side or rush to a bank to buy a car or a home.”
To contact the reporter on this story: Souhail Karam in Rabat at skaram10@bloomberg.net
To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky, Tarek El-Tablawy
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