Rabat - As Morocco witnessed a favorable economic conjuncture in 2017, Bank Al Maghrib (BAM) is gradually edging towards increasing interest rates to balance inflationary pressures stemming from rising commodities and food prices. For BMI Research, the Moroccan central bank’s policy will help support the value of the dirham.
Rabat – As Morocco witnessed a favorable economic conjuncture in 2017, Bank Al Maghrib (BAM) is gradually edging towards increasing interest rates to balance inflationary pressures stemming from rising commodities and food prices. For BMI Research, the Moroccan central bank’s policy will help support the value of the dirham.
While inflation rate saw a rapid decline in 2017 settling around 0.9 percent after recording 1.6 percent in 2016, BAM expect this rate to pick up to 1.3 percent in 2018 reflecting improved domestic demand and rising inflation among key partners.
In its latest economic analysis entitled “Modest Monetary Tightening From 2018,” BMI echoes the Moroccan central bank’s findings, explaining this forecasted uptick in inflation by rising oil prices. But while BAM’s inflation forecasts for 2018 are quite modest, BMI expect the inflation rate to average 2.1 percent.
As the good agricultural season boosted the national economic growth recovery to settle around the 4 percent after its sharp decline in 2016 to 1.2 percent, food prices plummeted significantly. However, BMI expects the situation to normalize in 2018, as grain and energy prices increase over the course of the year.
Still, BMI reassures that the Moroccan government will comfortably be able to manage these inflationary pressures, as the recovery in commodities prices “will only be gradual and a number of prices are still managed by the government.”
Good news for the dirham liberalization reform
For the research firm, the risks of higher inflation will motivate BAM to hike up interest rates from 2018 onwards, a move BMI expects to boost BAM’s willingness to “support the exchange rate, especially as it seeks to gradually liberalise the dirham.”
Although this increase in interest rates will be broached at a modest pace of “one 25bps hike in 2018 and another one of similar magnitude in 2019,” according the BMI, this gradual monetary tightening will support the value of the dirham.
Since the dirham has a crawling peg to the euro at 60 percent and the dollar at 40 percent, BMI expects BAM’s monetary policy “will fall between the US Fed’s and the European Central Bank’s cycles.”
While the Moroccan central bank did not follow the Fed’s hikes of interest rates throughout 2017, BMI believes that the BAM will implement modest hikes in its turn, especially since Morocco is trying to gradually introduce greater flexibility in its exchange rate.
However, BMI warns that widening interest rate differentials could in fact, raise fears of disorderly depreciation of the dirham once BAM introduces the liberalization reform, “potentially fueling speculations over the dirham.”
Still, BMI reassures that due to the small magnitude of hikes, the monetary tightening cycle will have limited impact on credit demand and liquidity in Morocco, which also limits risks for economic activity. Seeing as BAM has constantly lowered interest rates since 2008, this policy did not result in an acceleration of credit demand, as some had speculated. Therefore, BMI stresses that there is very limited risks posed by modest and gradual hikes in interest rates on Moroccan economy.