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Morocco's central bank left its key interest rate steady for the second time, saying the current accommodative monetary policy stance remains appropriate in light of the double shock to the economy this year from the COVID-19 pandemic and drought.


The Bank of Morocco, or Bank Al-Maghrib (BAM), maintained its policy rate at 1.5 percent, as in its previous meeting in September, after cutting it twice this year by a total of 75 basis points following cuts in March and June.


Morocco has been hit by a double shock this year, both the pandemic and persistent drought that hit farm crops, with the government easing its fiscal policy to minimize the economic and social impact.


"On the national level, data for the last two quarters illustrate the extent of the double shock suffered by the national economy due to the pandemic and unfavorable climate conditions that marked the previous agricultural season," the central bank said.

Morocco's gross domestic product contracted 14.9 percent in the first quarter year-on-year after 0.1 percent growth in the first quarter, with non-agricultural activities shrinking 15.5 percent and valued added in agriculture down 6.9 percent.


The labour market has also been hit hard, with the unemployment rate rising to 12.7 percent in the third quarter from 12.3 percent in the second quarter, for the highest rate since the fourth quarter of 2001.


BAM now expects the economy to contract 6.6 percent this year, up from its September forecast of 6.3 percent and the June forecast of 5.2 percent, as the recovery from the second quarter is expected to remain slow and only partial amid a new surge in infections.


In the medium term, an improvement in household income and measures to support investment, the output of non-agricultural actives should reach 3.3 percent in 2021 and 3.6 percent in 2022.


Agricultural output is also expected to bounce back, growing 13.8 percent next year and 2.0 percent in 2022.


Overall, the economy is seen expanding 4.7 percent in 2021 and then 3.5 percent in 2022, though BAM cautioned the forecast remains surrounded by a high degree of uncertainty.


But the balance of risks are to the upside, the bank said, pointing to the beginning of COVID-19 vaccinations and the establishment of a strategic fund dedicated to investment.


Last month the International Monetary Fund (IMF) forecast Morocco's economy would shrink between 6 and 7 percent this year, depending on the extent of the virus, but then rebound and expand 4.5 percent in 2021 as the impact of the drought and pandemic wanes.


Although Morocco's fiscal and external deficits are set to widen this year due to lower tax receipts and tourism revenue, the IMF said the resilience of remittances and lower imports have contained its needs and its international reserves remain comfortably above last year, helped by IMF's precautionary liquidity line in April and the country's access to external financing.


And while the economic recovery is sluggish, inflation has accelerated sharply in the last three months, mainly due to higher food prices.


After inflation was negative May through July, it rose in August and September to 1.3 percent in October.


BAM forecast inflation should average 0.7 percent this year, up from its September forecast of 0.4 percent, and then remain almost stable in 2021 before rising to 1.3 percent in 2022 as demand improves.