Fitch Solutions forecasts a two-step rate hike to reach 2% in 2022. Economists remain divided on this anticipation. BAM remains faced with the dilemma of continuing to boost growth or lowering rates and stabilizing prices.
The galloping inflation experienced by Morocco since the beginning of the year continues to cause concern. Predictions about a change in the key rate are still flying, on both sides, who to insist on raising rates and who to favor the status quo. Fitch Solutions, in its latest note, expects an increase in the key rate from Bank Al-Maghrib, in two stages from the next council, to reach, in fine, 2% at the end of this year. The Anglo-American rating company explains that soaring inflation, combined with a drop in GDP growth, should push the government to activate an aggressive monetary tightening policy in order to ensure price stability. Remember that inflation increased by 5.9% year on year for the month of April, the monthly rate never reached before. It was driven in particular by food prices, which increased by 9.4%.
This opinion divides the economists contacted. Omar Bakkou, economist, specialist in foreign exchange policy in Morocco, believes that an increase in rates is not favorable in the current conditions and that Bank Al-Maghrib should still wait some time. “The monetary authority is certainly faced with a dilemma: an inflation rate that exceeds the norm experienced by Morocco in recent years and the continued support for economic growth”, he explains. If the central bank raises its key rate, access to bank credit would be tighter, with less liquidity available in the banking circuit and finance companies. This should worsen financing conditions for a good part of the population, which is already impoverished because of the deterioration in its purchasing power, due precisely to this inflation. “We must not forget that this is an imported inflation and therefore active through costs and not through the monetary sphere. Especially since it is not generalized, but localized and is far from being the result of a lax monetary policy”, he adds.
Otherwise, under the current conditions, the country needs more than ever to revive economic growth, post-pandemic. Besides, it will have to avoid the implementation of a monetary policy which makes credit more expensive. Add to that the fiscal policy adopted by the State shows a fairly high deficit. “A rise in rates should contribute to an increase in the cost of future government debt. This should not play in favor of the internal financing of the State, especially since it currently advocates a fairly broad debt policy”, adds Mr. Bakkou. Allusion made to the various aids to the tourism sector, to transporters… “If we align all these factors, it would be better to temper on an imminent increase in interest rates”, concludes our economist.
Nevertheless, another economist, Nabil Adel, has advocated a rate hike since 4e quarter of last year. According to him, “this same inflation which is imported has found favorable conditions in the country to settle there, with low interest rates, a credit machine that is running well and a well-supplied demand”. By provoking purchasing power, demand grows and leads to inflation. This low interest rate policy has been in place for almost 10 years. Its objective is essentially to encourage investment, create employment and therefore maintain economic growth. It certainly worked for him. But, “for the same level of productivity, this had the effect of inflating inflation”, adds Mr. Adel.
The government is also responsible for this level of inflation reached. “Instead of putting in place restrictive budgetary measures to limit it, contrary steps have been taken such as the increase in the minimum wage, the health coverage program and all the other measures linked to the support of purchasing power. This will contribute to further widen the deficit which is considered to be the best ally of inflation”, says Mr. Adel. It is by reducing public spending that a component of demand breaks down and inflation compresses. Obviously, this logic is well known to the government. Still, in the interest of the State and the citizens, it is not possible to go back on the social choices of the Executive. This is all the more so as the generalization of social protection is a royal project.
The welfare state is a choice that the government does not intend to change, whatever the circumstances. Faced with this observation and since inflation began to make itself felt at the end of the 3e quarter of last year, the monetary authorities were, according to the economist, to proceed with a rate hike as of the 4e quarter 2021. “They missed expectations. They must not miss the actions. Raising rates will compress credit and therefore demand and, de facto, inflation,” he insists. However, it will result in an economic recession for sure for some time; but “it would be better the bad now than the worst tomorrow”, he quips. In his opinion, even if the monetary authorities seem to have missed the turn, there is still time to stop the gangrene, especially since the duration of the transmission of monetary policy is 6, 9 or even 18 months.
In other words, the action by the rates and its diffusion on the circuit of the real economy takes on average one year. It is thus one more year of inflation to be supported by the State, the economic actors and the citizens. In short, “It is urgent to take action”again according to Mr. Adel.