What economic impact of raising the key rate?

The institution finally leaned in favor of supporting price stability in Morocco. In its recent “Research report – fixed income”, the analysts of Attijari Global Research (AGR) believe that the short-term impact of this significant increase in the Key Rate should a priori be restrictive on domestic demand through the channel of bank loans. Nevertheless, continues the same source, this first increase does not seem able to restore real rates to positive territory. Consequently, pressures on the remuneration of savings should continue in the short term.

What are the expected impacts on growth, travel receipts, FDI and MRE transfers?

Bank Al-Maghrib made a historic turning point by raising the key rate to 2%, in response to galloping inflation. A decision that should have an impact on domestic demand, growth, travel receipts, FDI and MRE transfers.

It’s unprecedented. For the 1^time time since 2008, Bank Al-Maghrib has raised its key rate (TD) by 50 basis points (bps) to 2%. By making such a decision, the central bank finally leaned in favor of supporting price stability in Morocco. At least that is what Attijari Global Research (AGR) estimates in its recent “research report – fixed income”.

“This monetary reversal is in line with our initial scenario expressed in June 202 (see Key Rate June 2022). This decision attests to a change in BAM’s perception of the “transitory” nature of inflation in Morocco. From now on, the institution has as a priority the attenuation of the inflationary pressure which seems more and more durable”, estimates AGR.

By adopting such a reversal of its monetary policy, continues the same source, Bank Al-Maghrib is opting for a tightening that is both strong and rapid. The objective is to deal with inflationary risks that could weigh on long-term growth prospects.

Despite the challenges of post-Covid economic recovery and the risks weighing on growth in Morocco, BAM thus seems determined to counter recent inflationary pressures. Indeed, BAM aligns itself with the trajectory of the major Central Banks internationally to fight against inflation mainly imported into Morocco.

Expected impact on domestic demand

In the short term, AGR analysts believe that the short-term impact of this significant increase in the Key Rate should a priori be restrictive on domestic demand through the channel of bank loans. Nevertheless, this 1st increase does not seem capable of restoring real rates to positive territory. Consequently, pressures on the remuneration of savings should continue in the short term.

Under these conditions, this first increase in the Key Rate could be, according to AGR analysts, the start of a new cycle of monetary tightening by Bank Al-Maghrib.

Depreciation of the dirham, a factor that fuels inflation

AGR analysts stress, moreover, that it is obvious that a lasting inflation at the national level could constitute a serious constraint to the economic recovery insofar as the purchasing power of households would be affected. Today, it is clear that there is a new source of risk capable of maintaining inflationary pressures in 2023. This is the continued depreciation of the Dirham against the Dollar, in a context of aggressive increases in Key Rates from the Fed.

At the same time, liquidity conditions on the interbank foreign exchange market would be less favorable due to the increase in import flows. To this end, AGR analysts point out that more than 50% of Morocco’s imports are made in dollars and mainly concern energy and cereal products. This situation propelled the difference between the reference rate of the Dirham and its Mid-basket to more than +3.60%, i.e. its highest since the implementation of the exchange rate reform in 2018.

The latter is thus approaching the upper threshold of the fluctuation band of the dirham set at 5%. Under these conditions, the Dollar/Dirham parity reached its highest in more than 10 years, at 10.81, up 17% since the start of the year.

Main adjustments to BAM forecasts

In its recent “research report – fixed income”, published on September 29, AGR analysts believe, on the other hand, that the rise in the TD by 50 bps has prompted the central bank to revise its growth projections as well as the inflation outlook for the period 2022-2023.

“In view of BAM’s monetary tightening and the continuation of inflationary pressures, BAM is once again revising its growth projections downwards in 2022. This should stand at 0.8% against 1.0% initially. The Moroccan economy remains weakened in 2022 by a weak agricultural campaign of 32 MQx against a record of 103 MQx in 2021 and an unfavorable international context.

In 2023, Moroccan growth should stand at 3.6% against 4.0% initially suffering from the restrictive effects of the rise in the TD on the consumption and investment channels. The non-agricultural component of GDP would show a deceleration in its growth rate to 2.5% in 2023 against 3.4% a year earlier. Regarding the crop year, a return to a normative cereal production rate of 75 MQx is projected in 2023E.

Inflation outlook revised upwards in 2022

Similarly, given the rise in the TD to 2%, inflation is revised upwards in 2022 to 6.3% against 5.3% initially. It should return to a moderate pace according to BAM’s projections at 2.4% in 2023.

“Inflation in Morocco remains fueled by imports through food and transport components. These represent almost 2/3 of the basket of the Moroccan consumer. Unlike Western countries, inflation in Morocco is seen as “Supply” inflation rather than demand inflation. Under these conditions, inflation is revised upwards in 2022 to 6.3% against 5.3% initially”, underlines AGR.

Revision of the growth rate of credits to the economy

Taking into account the expected tightening of financing conditions for the economy, BAM also expects a moderate increase in bank loans, i.e. 4.0% in 2022 and 3.6% in 2023.

The liquidity deficit should widen to nearly 90 billion dirhams in 2023, mainly reflecting the growth of fiduciary money in the medium term, while foreign exchange reserves should continue to strengthen over the medium term.

Foreign currency reserves should reach new records in 2022 and 2023 at more than 340 billion dirhams supported by the appreciation of travel receipts, FDI, MRE transfers as well as the concretization of external Treasury financing provided for under the Law of finance 2022 to 40 billion dirhams by the end of the year.

“A significant impact on the evolution of inflation in 2023”

The president of the Moroccan Center for Governance and Management (CMGM), Youssef Guerraoui Filali, said that the decision to raise the key rate to 2% by Bank Al-Maghrib should have a significant impact on the evolution of inflation. in 2023.

In a statement to MAP, Mr. Guerraoui said that this decision to increase the key rate was expected by investors, particularly in a context where inflationary tensions persist and continue to impact the national economy globally, noting that It also aims to curb the progression of inflation and guarantee the conditions for a rapid return to levels in line with the objective of price stability.

In this regard, he explains that the increase in the key rate would thus mean a slowdown in demand for loans, which will become more expensive for citizens and businesses, thus limiting the volume of the money supply in circulation, and thus the fall of inflation.

Definition of the policy rate

To carry out their missions, central banks use different interest rates that they set freely. Among these rates, the refinancing rate represents the price at which commercial banks buy their liquidity in order to provide credit to households and businesses. Movements in the central banks’ key interest rates therefore have a direct impact on the money supply in circulation and, in fact, on the economic activity of their country.

Key rates are the short-term interest rates set by central banks (see the article on central banks). The latter use them to steer their monetary policy and consequently control the money supply and regulate the economic activity of their country.

Economic growth in Morocco in 2023 according to the EBRD

The economic recovery in Morocco is expected to slow to 1.1% in 2022, after a record rebound of 7.4% in 2021, underlines the EBRD in its new report on the regional economic outlook.

GDP grew by only 0.3% year-on-year in the first quarter, the same source said, explaining that this situation is due to the contraction of agriculture, due to the drought.

The poor agricultural season is increasing demand for imported foodstuffs at higher international prices, amid global supply chain disruptions, which has pushed Morocco’s inflation rate to 5.1% in the first semester, adds the same source.

For 2023, the EBRD forecasts GDP growth of 3.3% as agriculture recovers and the pace of growth in other sectors returns to pre-pandemic levels.