Key rate, inflation, growth … The challenges of Bank Al-Maghrib’s next board of directors


Speculations have already been launched about the decision that Bank Al-Maghrib’s board of directors will make in a week, some expect a key rate hike to curb inflation described as runaway, while others are counting on a status quo to continue supporting. the growth of the national economy, which this year will be weak (between 1% and 1.5% according to the various economic institutions), through the maintenance of an accommodating monetary policy.

This accommodative monetary policy was decided in Morocco, but also in other economies of the world, when the health crisis began in early 2020 and its devastating impact on economic growth. It was then a question of supporting economic activity, whatever the cost, and therefore its relaunch, lowering the cost of money, in order to ultimately encourage consumption and investments.

“In 2020 BAM lowered the key rate twice, in March and then in June, taking it from 2.25% to 1.5%. This rate, which remains the lowest historically, is an important component of the monetary easing policy adopted by the central bank to cope with the effects of the pandemic on the Moroccan economy “, remembers Omar Bakkou, economist, specialist in political exchanges in Morocco, contacted by Il360.

This policy provides, in addition to the reduction of the key rate, “a panoply of measures aimed at improving bank resources (volume and cost), in particular the complete release of the bank’s compulsory monetary reserve account at BAM, the extension to a large range of securities and bills accepted by the central bank in exchange for the refinancing granted to the banks, the extension of the duration of such refinancing, etc. ”, explains this expert.

Support growth or curb inflation? a delicate arbitration

But today the situation has changed a lot and the question of raising the rate arises acute, with a view to guaranteeing price stability which is, it must be remembered, at the heart of a central bank’s mission (targeting inflation at a fixed rate). average of about 2%).

However, since the beginning of the year, inflation has been well above these levels. The war in Ukraine, in particular, has led to a surge in the prices of basic products (hydrocarbons, cereals, metals, etc.), which has a negative impact on prices in the importing countries of these products, including Morocco.

The latest statistics testify to this: the Consumer Price Index (CPI) recorded an increase of 5.9% in April 2022 compared to April 2021, mainly driven by the increase in food prices (+ 9.1% ) and transport prices (+ 12.4%).

In this context, BAM will have the delicate task of arbitrating between two imperatives, that of continuing to support growth and job creation (keeping the rate at 1.5%) and that of stemming the rise in prices by raising the policy rate.

Last March, the central bank chose to maintain the status quo, believing that the inflation recorded “was not structural” and expecting a return of inflation to moderate levels in 2023.

“Given the inflation forecasts for 2022 (a rate of 4.6%, well above the 2% target) one could logically think that the rates should have increased. Conversely, the data for 2023 show that this inflation is expected to dissipate and fall below 2%. We have converged this data with the need to sustain growth. If our forecasts had shown that inflation would have remained high in 2023, we would have raised the key rate “, argued Bank Al-Maghrib wali, Abdellatif Jouahri, who however specified that things could change rapidly:” if the situation requires a Board of Directors before the quarterly deadline, we will do it, to adjust our monetary policy as soon as possible to the available data ”.

Key rate, how does it work?

To understand the topics of the next BAM Board meeting well, it is useful to remember what a key rate is for, how it works and how it affects the economy.

“The key interest rate is the rate at which the central bank lends money to banks. He is called a director because he is supposed to direct interest rates in the capital market. Directing interest rates in the capital market means directing the interest rates at which banks borrow money (deposit interest rate) and those at which banks lend money (debt interest rate) “, explains Omar Bakkou .

“The impact of the guide rate on the lending rate operates through the following mechanism: when the central bank changes its guide rate, we suppose downward, this means that it undertakes to lend money to banks at a lower interest rate than previously prevailing in the money lending market. As a result, banks will lower the lending rate of the funds (rate on semiannual deposits, term deposits, book accounts, etc.), “he explains.

“As regards the impact of the guide rate on the lending rate, it operates through the following mechanism: when the central bank changes its guide rate, we suppose downwards, it acts on the average total cost of bank resources, which are made up of free resources (demand deposits that are made by customers with interest-free banks) and expensive resources (term deposits). This reduction in the cost of bank resources puts downward pressure on bank lending rates to the economy (consumer loans , business loans, Treasury bill rates, etc.) “, he adds. .

On the contrary, a rise in the key rate increases the cost of money for banks and therefore for economic agents (families and businesses in particular) and consequently limits their ability to borrow.

As Omar Bakkou points out, “raising the key rate is often an unpopular decision, because it equates to increasing the cost of money”. And to explain: “the increase in the price of money is ultimately to favor savers to the detriment of debtors, that is, on the one hand, consumers who buy money through bank loans, to buy capital goods and real estate, for example, and from on the other hand, companies that need money to replenish their cash flow or to invest “.

It is for this reason that central bankers speak of a “soft landing”. The goal is to achieve a situation where interest rates rise and demand falls sufficiently to lower inflation, without stopping economic growth and without increasing unemployment. It goes without saying that this handling is very complex.

Several central banks have raised rates

However, globally, in this context of severe inflationary pressures, several central banks have already begun to tighten their monetary policy.

This is in particular the case of the US Federal Reserve which, last May, raised its reference rate by 50 basis points (bps), to cope with inflation which reached 8.5% in March 2022. the highest level since 1981.

For its part, the European Central Bank (ECB) announced Thursday 9 June that it will proceed with the first rate hike in more than ten years on 21 July, in an attempt to contain the rise in prices.

In Africa, faced with the almost generalized rise in prices, many central banks also took the plunge in May. This is the case, in particular, of Tunisia, which increased its key rate by 75 bps to reach 7%, of Ghana (+450 bps base twice to reach 19%), of Egypt (+200 bps for reach 11.25%) or Nigeria (+50 bps to reach 13%).

“We are in an inflationary situation, with high rates, as in the United States and the Eurozone. Thus, mechanically, the tool used by central banks is to raise the price of money so that this gives rise to the issuance of credits and smaller money masses. This is likely to limit price increases and counter inflation, “explains Omar Bakkou.

Will BAM follow suit? Reply within a week. And whatever decision is made, you will have to be convincing.

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