Mozambique's central bank cut its monetary policy rate for the seventh time in a row as forecast that show inflation will remain in single digits justify continuing the easing that began in April 2017.
The Bank of Mozambique (BM) cut its MIMO (monetary policy rate) by another 75 basis points to 15.75 percent and has now cut the rate by 600 basis points since April last year when MIMO replaced the standing facility rate as the new signal rate and set it at 21.75 percent.
This year BM has cut its policy rate three times by a total of 375 basis points.
BM also lowered the standing deposit facility (SDF) rate by 50 basis points to 12.0 percent but maintained the standing lending facility (SLF) rate at 18.0 percent along with the reserve requirement for domestic currency liabilities at 14 percent and for foreign currency liabilities at 22 percent.
As in recent months, the central bank said it would continue to monitor economic and financial indicators as well as risk factors and "may take the necessary corrective measures before the next meeting" of its monetary policy committee.
While economic conditions continue to favor low and stable inflation, the central bank said monetary policy will continue to be prudent in light of risks from the stability of public debt along with the evolution of regulated prices. BM also noted external risks from recent trade tensions between major economies, a volatile U.S. dollar and commodity prices, especially oil.
Mozambique's inflation rate rose to 3.26 percent in May from 2.33 percent in April but was down from 20.45 percent in May 2017 due to higher transport and liquid fuel prices.
Excluding administered prices, inflation in May was 1.03 percent.
Economic growth in Mozambique remains moderate, BM said, saying Gross Domestic Product grew an annual 3.2 percent in the first quarter of this year, down from 4.5 percent in the same 2017 period and down from 3.7 percent in the fourth quarter of last year.
But in contrast to the first quarter of last year, where several sectors slowed, all sectors saw positive changes this year apart from electricity and water, which shrank by 1.8 percent.
In April the economic climate index improved, reflecting optimism by entrepreneurs, especially those in the transport and trade sectors, BM said.
Banks' lending rates have shown "a timid reaction" to BM's rate cuts and credit to the private sector remains stagnant at a time of a continuous rise in internal public debt, BM said, noting the public deficit worsened in the first quarter, putting pressure on domestic financing.
Improved external demand is supporting Mozambique's exports, with the trade deficit down by US$113 million in the first quarter of this year from the same 2017 period due to an increase in exports of US$194 million while imports rose $82 million.
The current account deficit, however, rose by $153 million to $964 million, mainly reflecting the payment of services by large foreign direct investment projects.
Despite the global trend of a stronger U.S. dollar, Mozambique's metical - which 38 years on June 16 ago replaced Portugal's escudo - has appreciated since early March and is now at levels similar to the start of this year.
The metical was trading at 59.2 to the dollar today compared with 58.9 at the start of this year and up 5.9 percent since a 2018 low of 62.7 on March 9.
Mozambique's international reserves declined slightly to $3.235 billion, enough for 7 months of imports, from $3.260 billion at the end of the first quarter.
