Mozambique's central bank lowered its benchmark standing facility rate by 50 basis points to 22.75 percent and set the new monetary policy interest rate (MIMO) at 21.75 percent.
It is the first rate cut by the Bank of Mozambique since November 2014 and the first change in rates since a sharp 600 point rate hike in October last year. In 2016 the central bank raised its rate by a total of 13.50 percentage points last year as it battled rising inflation and currency depreciation.
The central bank said the rate cut reflected a favorable change in inflation and the exchange rate of the metical despite the risks of further price changes, worsening liquidity in the banking system and the resumption of foreign aid to the government.
In February the central bank's monetary policy committee (CPMO) announced it would be switching to MIMO as new benchmark rate with effect from April 15 to strengthen the formation of interest rates and make the process more transparent and in line with international practices.
At that time, the central bank also said its two rates that have been used to intervene in markets, the permanent liquidity transfer facility rate (CPF) and the Permanent Deposit Facility rate (FPD) would remain, with the new monetary policy rate fluctuating between those two rates.
Today the central bank said the FPD rate was maintained at 16.25 percent while the compensation reserve ratio (RO) for liabilities in domestic and foreign currency was at 15.50 percent.
The central bank also adjusted its prudential standards for financial institutions, in line with international best practice, raising the minimum capital stock over three years to 1.7 billion meticais from 70 million meticais and the minimum solvency ratio to 12 percent from 8 percent.
Mozambique's inflation rate rose slightly in February to 20.88. percent from 20.56 percent in January but remains below the record high of 26.35 percent in November 2016.
Gross Domestic Product grew by an annual rate of 1.1 percent in the fourth quarter of last year, down from 3.7 percent in the third quarter.
Mozambique's economy has been hit by several severe blows in recent years, leading to a sharp fall in the exchange rate of its metical currency.
On top of the fall in global commodity prices, including coal, last year it was discovered the government had hidden almost US$1.4 billion of debt, the equivalent of 10 percent of its Gross Domestic Product. This led to foreign donors, including the International Monetary Fund, to withdrew funding to the country.
The metical hit record lows of around 78.5 to the U.S. dollar in October last year but has firmed since then, helped by central bank rate hikes and rising commodity prices.
Today the metical was trading at 66.3 to the dollar, up 18.4 percent since the historic lows last October and up 7.4 percent this year.
But compared with the beginning of 2015, the value of the metical is still about half its exchange rate of 33 to the dollar on Dec. 31, 2014.