The 50 basis point (Bp) increase in the key rate decided at the end of last December by the central bank is still arousing debate within the economic microcosm. This is the second in 3 months. It made it possible to increase Bank Al Maghrib’s reference rate by 100 basis points between September and December.
Note that the Moroccan central bank remains one of the most conservative in the region and even compared to Europe or the USA and held until the end of 2022 before yielding rate hikes.
In comparison, between the end of 2021 and the end of 2022, Egypt increased its benchmark rate by 800 basis points to 16.25%. It has just devalued its currency by another 50% to meet IMF criteria. Jordan increased it by 400 bps to 6.5% between 2021 and 2022 while Tunisia increased it by 175 bps to 8% over the same period.
At the level of major economies, the US Federal Reserve increased its rate by 425 bps, going from a key rate of 0.25% in March 2022 to 4.5% in mid-December, the highest rate since the before the premium crisis in 2008 (5.25%). The ECB has increased its rate by 250 bps in 2022, going from 0% since 2016 to 2.5% in mid-December 2022. increases in US and European rates in the short term.
Mission: to curb inflation
According to economic theory, in a phase of inflationary pressures in an open economy, increases in the key rate make it possible to lower demand, which results in lower prices and therefore to curb inflation.
However, this approach is not easy to apply in Morocco insofar as many actors and analysts believe that the rise in inflation is due more to exogenous factors. According to them, it is not locally generated inflation.
In other words, in the absence of significant wage increases in Morocco, price increases are not due to excess demand. They are rather linked to the increase in international prices which mechanically affect local prices, in particular those of hydrocarbons and widely imported basic necessities such as oils, wheat and sugar. They also affect certain intermediate products linked to energy prices such as steel, aluminum or ammonia, for example, or equipment products such as vehicles, machines, household appliances, etc.
The other price increase factor is the quotation of international freight, that is to say the prices of maritime transport. With geopolitical tensions or the reorientation of post-covid international freight towards the major markets, secondary markets such as those in Morocco are neglected and therefore the cost of freight increases more than proportionally than the world average. These are also boosted by the increase in fuel prices.
Can imported inflation be curbed by the key rate? Added to this thorny question, which has not been settled and sparked debate, is the risk, generated by the rise in the key rate, of seeing an increase in the price of the rent of money for households and businesses rather than limiting inflation which directly affects the standard of living of households.
The risk is that this increase will primarily affect the cost of business cash and that of household investment (purchase of real estate, household equipment, etc.) and businesses more than the prices of goods, which constitute the bulk of the household basket.
What are the arguments of Abdellatif Jouahri, Wali of Bank Al Maghrib to justify the recent decisions of the central bank and what reading and interpretation do economists make of them?
“Catching up on the international trend”
For the economist Abdelouahed El Jai, a specialist in monetary policy, the decisions of the central bank are above all a matter of “catching up on the international trend”. “If I were the central bank, that’s what I would do for the simple reason that everyone else is doing the same thing.”
For him, in a context of uncertainty, the central bank aligns itself with the general trend, so as not to create too many shifts between the national rates and those of our main partners and especially of preserve the parity of the dirham even if inflation was imported.
“I expect key rate increases to be maintained over the next few quarters, because we have barely returned to 25 bps above pre-Covid rate while the fundamentals are not the same with high inflation and a major international conflict in Europe, our main economic partner,” adds our economist.
Recently, the rating and credit risk assessment agency, Fitch Solutions, thus counted in early January on a continuation of the increase in the key rate by Bank Al Maghrib (BAM) in connection with a maintenance of inflationary tensions in 2023.
Low impact on inflation
According to El Jai, it is necessary to relativize the perception as to the impact of these rate increases on inflation for several reasons. Beyond the fact that inflation is largely imported, the effect of rate increases is not very large on the real economy lack of rapid transmission central bank decisions.
The effects of policy rate changes are generally only apparent between 6 and 8 quarters according to the various research papers published by BAM since 2016.
This discrepancy between the action of increasing rates and its effects, i.e. the speed of transmission, refers us to another economic reality: that linked to the low dependence of banks on bank rates central, at least in the banking market.
“Bank Al Maghrib’s advances directly linked to the key rate represent only 10% of banking resources overall, that is to say that if we calculate an increase of 100 PdB on these 10% of resources, the impact of monetary policy remains quite limited on the overall cost of banking resources. A marginal increase in rates will not necessarily limit the investment decisions of households or businesses,” analyzes El Jai.
The increase in rates therefore seems to be a fashionable decision taken by BAM which would not directly affect the price levels of tradable goods. Above all, it will allow, according to El Jai, “to restore the room for maneuver of the central bank, largely undermined by the various cuts in connection with the stimulus policies during the Covid and not to blame BAM for inaction if inflationary trends persist. “.
Acting on expectations
However, the symbolic significance of the increase is significant. Thus, the central bank’s justification for this increase in rates is to “prevent any unanchoring of inflation expectations and promote the return of inflation to rates in line with the objective of price stability”. In other words, the primary objective of BAM is to act on people’s consciences, on the “actors’ expectations” rather than on inflation as such.
“Seeking the anchor of inflation is part of the doctrine of New Classical Economics. It allows central banks to act on players’ expectations and warn them regarding the coming economic situation,” explains Abdelaziz Ait Ali, Senior Economist at the Policy Center for the New South.
By raising its key rate while maintaining a forecast for inflation to rise to 3.9% on average in 2023 and 4.2% in 2024, the central bank is sending the signal to the market that inflation is on the rise. endogenous part and not only exogenous.
Indeed, with an increasingly significant openness of the national economy to international trade (dependence on imports both in terms of basic necessities and re-exported intermediate products, a fairly high international debt component, etc.) impact of global inflation is partly integrated into the national market through the channel of trade and debt.
Moreover, by justifying the resurgence of inflation in 2024 by decompensation, it fixes in the calendar a deadline for this important reform. Finally, it informs that to maintain inflation anchored in its target, it will continue on its course of actions.
These messages are given credibility by other actions, in particular the recourse as of January to the repurchase of Treasury bonds on the secondary market. Its action thus makes it possible to absorb part of the shock of the rise in the key interest rate on Treasury bill rates.
It also aims to reassure the capital market, to inform it that it is present to soften the effects of increases in the key rate made and those anticipated so as not to create blockages on another market dependent on the key rate, namely the public debt market.
Jouahri’s arguments
In September 2022, on the occasion of the first increase in the key rate in 2022, Jouahri explained the decision by lacceleration of inflation and its generalization to domestic products.
“It is better to pay a light price by acting quickly on inflation by raising the key rate, rather than waiting to see it generalize and last over time. Because then we would be forced to take drastic measures that would have stronger impacts on both citizens and businesses,” said Jouahri.
According to him, despite this increase of 50 points, the increase in the key rate and the increase in the cost of financing which will ensue will have a weak impact on the economy. The impact on GDP growth will be limited to between 0.1 and 0.2% at most, he confided.
He had even revealed that the Board of the Central Bank had discussed and then dismissed the scenario of a rise of 75 basis points. “We were not excessive. Because if we wanted to return to inflation of 2% in 2023, we would have had to increase the key rate by 75 basis points. But we did not choose this option, because we we believe that there are still a lot of internal and external uncertainties.
A few weeks later, last December, the Central Bank Board raised the rate by 50 bps to bring it at 2.5%. “Regarding the current upside, why 50 bps and not more or less? First we have our models that show us what is the policy rate in line with recorded inflation levels. It should also be noted that inflation is falling. It remains at high levels, but decelerating. We are going from 6.6% in 2022 to 3.9% in 2023, and therefore, we have taken this slowdown into account”, argued the Governor.
“By adding the increase in September and this one, we arrive at 100 bps, which is still significant in the context of what we want to do. This level will allow us to better anchor inflation expectations. We’ll see how it behaves by 2024, because we’re going to remove offsets. The compensation in 2024 will be 8 billion dirhams, and then very insignificant amounts. Regarding inflation, we will see if the peak is behind us,” he continues.
The Wali recalls each time the opportunity arises that “Bank Al-Maghrib’s mission is to curb inflation. Support for purchasing power and growth are part of the government’s work”.
