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Baby steps towards unlocking growth

Yesterday's cut in interest rates may not make a big difference to the economy, but more loosening of monetary policy should follow

Bank of Mozambique Governor Zandamela giving a press conference yesterday

Good afternoon. The Bank of Mozambique’s decision yesterday to cut the reference interest rate, by 0.75 percentage points, is major and minor at the same time. It is major in that rates have stayed the same since September 2022, and the first time they have been lowered since June 2020. For over a year now, the central bank has been concerned first and foremost with controlling inflation, but as the International Monetary Fund (IMF) has been saying, inflation is well under control. Estimates of consumer price inflation seem to vary between the central bank and the National Institute of Statistics, but they point to inflation currently sitting at around 4-5%, well within the bank's single-digit target. 

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It is a minor change, however, because interest rates still remain high at 16.5%, continuing to restrict the availability of credit (considering the rate of inflation, and the fact that the reference rate is lower than the central bank’s lending rate, real interest rates remain prohibitive) and thus the scope for investment. Bank governor Rogério Zandamela, a former IMF executive who tends to listen to his former employer, made clear yesterday that this rate cut was just the first move in a journey of planned rate cuts to be spread over the next 2-3 years. Meanwhile, Mozambique has to make do with baby steps. There was no announcement yesterday about reducing banks’ mandatory reserve requirements, which have also restricted commercial bank financing.

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