2023-06-25 15:52:35
“BAM’s pause came against our expectation of a 50 basis point (bp) hike despite high inflation. During the bank’s press conference, central bank governor Abdellatif Jouahri cited the adoption of the recent package of MAD 10.0 billion by the government to fight against inflation and the aid package of MAD 10.0 billion to the agricultural sector mandated by King Mohammed VI as elements of a deflationary nature, which gives a reason sufficient for the bank to take a break to assess the lagged effects of monetary tightening,” the international rating agency explains in a new report.
The pause comes against a backdrop of sluggish economic activity, Fitch Solutions analysts say in the report entitled “Morocco: Hawkish Pause Raises Uncertainty Around Bank Al Maghrib’s Interest Rate Trajectory”.
“While we expect such measures to ease some of the Kingdom’s inflationary pressures, we believe that the cumulative monetary tightening of 150 basis points (bp) since September 2022 will be insufficient to bring inflation back to its implicit target of 2.0% in the medium term, encouraging BAM to continue its tightening cycle”, anticipates the same source.
Perspectives for the next meeting
For the next meeting of its Board of Directors, scheduled for September this year, the international rating agency expects BAM to increase the key rate by 50 basis points to 3.50%, l inflation remaining high. “Despite holding its interest rate at 3.00% at its last meeting, BAM called the move a ‘pause’ in its hike cycle, hinting at further rate hikes to come. .
This justifies our view for a further increase in policy rates, as inflation remains high and the real interest rate remains firmly in negative territory. Despite a deceleration from 7.8% year-on-year in April 2023 to 7.1% in May 2023, inflation remains well above target,” said Fitch Solutions. While inflation in May contracted by 0.4% thanks to government measures to limit the rise in prices, the agency believes that this trend is unlikely to continue, in part because of the slow agricultural production, which keeps food inflation high. Moreover, continues the same source, the real interest rate stood at -4.1% in May 2023, marking a significant divergence from the last decade, when the real interest rate rarely dipped in negative territory.
Long-term interest rate trajectory
As a result, Fitch Solutions expects monetary policy tightening in the 4th quarter of 2023 and the 1st half of 2024, with BAM raising its key rate to a terminal rate of 4.50% by 2024. This marks, according to analysts the agency, a downward revision from its previous forecast of a terminal rate of 5.00% in 2024 after BAM’s decision in June to pause its rate increase cycle. According to these analysts, inflation well above target and expected inflation rates on the rise are two main factors that will surely push the central bank to continue its monetary tightening.
Despite the slight downward revision of its inflation forecast for 2023 from 7.8% to 7.5% following May inflation, high inflation expectations, negative real interest rates, Sluggish agricultural output growth and expansionary fiscal policy will keep inflation high through 2024, they predict.
“Our forecast of an average inflation rate of 5.4% in 2024 due to government measures to phase out gas and sugar subsidies in 2024 also suggests that real interest rates will remain negative until in September 2024, which justifies our call for a further tightening of monetary policy,” adds Fitch Solutions.
BAM should continue its tightening cycle
Still, the international ratings agency foresees downside risks to its interest rate forecast, “as the central bank remains relatively cautious in its tightening cycle amid concerns over economic activity”.
“While not our primary view, BAM may tolerate above-target inflation longer than we currently expect to support economic activity. This will lead BAM to raise its interest rate more cautiously than we currently expect, either avoiding further rate hikes or reducing the pace of monetary tightening. Likewise, in the event that the current government measures cause inflation to decelerate stronger than expected, this would encourage BAM to become more cautious in its future rate hikes, leading to a lower terminal rate,” the same source thinks. .
The three points of vigilance identified by AGR
Moroccan analysts, it should be emphasized, also expect BAM to resume its restrictive course by the end of 2023 in order to ensure a return of inflation towards its medium-term price stability objective.
As a reminder, the Board of BAM decided, during its meeting on June 20, to keep the key rate unchanged at 3%. And this, after three successive increases of a total of 150 basis points. For Attijari Global Research (AGR), this decision appears to be out of step with the market consensus which predicted a further rise of at least 25bp. “After three successive hikes of 50 basis points since September 2022, the central bank decided to keep its main key rate (TD) unchanged at 3% in June 2023, i.e. at its highest since 2014”, underlines AGR in its last “Research report Fixed income”, noting that “this decision comes out of step with the market consensus which predicted a slowdown in the pace of the rise of the TD in June 2023 to +25 bps”.
Nevertheless, this “unexpected” status quo remains consistent with the downward trend in consumer prices in Morocco since March 2023. “After reaching a peak of nearly 30 years at 10.1% at the end of February 2023, inflation slowed for the third month in a row to reach 7.1% in May 2023. However, food inflation, the main component of the Moroccan consumer basket, remained high at 15.6% in May 2023 and underlying inflation stands at 6.4% during the same period”, explains AGR.
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