Morocco Likely to Hold Interest Rates at 3% in 2024 as Inflation Dips

Rabat – Morocco’s central bank Bank Al-Maghrib (BAM) will likely continue to hold interest rates at 3% throughout 2024 as inflation eases, according to a new analysis from BMI Research, a research center affiliated to the American rating agency Fitch.

The BMI analysis maintains that BAM is likely to retain benchmark interest rates unchanged despite continuing fluctuation in inflation rates and shifts in global economic dynamics.

Meanwhile, recent data from Morocco’s Higher Commission of Planning (HCP) revealed a notable deceleration in inflation from 4.3% year-on-year in October to 3.6% in November, echoing earlier projections that inflation would trend lower.

The 0.3% month-on-month dip in November 2023 prompted BMI Research to revise down its inflation forecast for 2024, from 3.3% to 2.6%. Meanwhile, BAM’s forecast for 2024 stands slightly lower at 2.4%.

The analysis attributes the expected policy rate stability to two primary reasons. The first reason is that while inflation is anticipated to decelerate in the initial quarter of 2024, reforms scheduled for April 2024, particularly the phase-out of subsidies on essential commodities like butane gas, wheat, and sugar, are predicted to cause a “moderate” hike in domestic prices.

The expected rebound in prices would maintain inflation at a slightly elevated level throughout the year, although not substantial enough to trigger a change in the monetary policy stance, BMI Research contends.

In addition, the research center anticipated BAM to tolerate slightly higher inflation and consider it necessary to support post-earthquake recovery efforts following the disastrous earthquake that hit central Morocco in September 2023.

The second factor underpinning the analysis is the negative interest rate differential with the European Central Bank (ECB). Maintaining negative interest rates compared to the ECB means Morocco is poised to benefit from capital flow as investors are likely to flock to the country seeking higher returns on investment.

Currently standing at negative 100 basis points, the differential is the most negative since the inception of the ECB. Despite measures in place to facilitate capital flow and recent changes in the exchange rate regime, aligning the policy rate with the ECB remains a strategic objective for BAM, the report explained.

The Moroccan dirham’s peg to a currency basket comprising 40% USD and 60% EUR, makes it crucial for the central bank to keep its interest rates aligned with those of the ECB to ensure monetary stability.

The report notably argued that unexpected factors, such as an exceptional agricultural output leading to lower domestic food prices, could potentially result in lower inflation, posing a risk to the projected interest rate forecast.