The discourse of central bankers on inflation has changed a great deal over the past few months. On the board table of Bank Al-Maghrib on June 21, there will be other parameters, including growth or Treasury debt, which will have to be taken into account. Since the end of 2019, the outstanding debt of the Treasury has increased by 158 billion dirhams to peak at 906 billion dirhams at the end of April. Beyond slowing growth, a possible increase in the key rate might increase the debt of the Treasury.
The decision that the nine members of the Board of Bank Al-Maghrib will take on June 21 is one of the most awaited in the financial world. Inflation that finds itself outside acceptable limits puts the central bank in a delicate position.
To stay true to its mandate, a rate hike would be the traditional response, especially if it considers the shock to be long-lasting. Its new inflation forecasts will therefore be closely scrutinized. But there are several other parameters on the table, including growth and Treasury debt. Despite the strong rebound of the economy in 2021, it is still recovering, and may not yet be able to withstand an interest rate hike. *
This eventuality would also increase the indebtedness of the Treasury. Outstandings have increased significantly in recent years due to the support measures deployed in the face of the coronavirus pandemic. Since the end of 2019, it has swelled by 158 billion dirhams to peak at 906 billion dirhams at the end of April. The domestic debt represents 77%, or 697 billion dirhams.
With the war in Ukraine, the outcome of which no one knows, public finances are still under great pressure. For the Treasury, it is better that interest rates remain low to continue to finance its needs at lower cost, especially since conditions have tightened significantly internationally.
The Treasury, one of the main beneficiaries of the accommodating monetary policy
If Bank Al-Maghrib were to increase the key rate this year – this is not the central scenario of several analysts but this option is not completely ruled out either (everything will depend on the inflation forecast) – it would be a first since June 2008.
Since then, the key rate has fallen by 200 basis points, going from 3.50% to 1.50% currently. The Treasury is one of the main beneficiaries. Between 2013 and 2021, primary bond rates fell by 285 basis points on average. Short-term sovereign rates are the most sensitive to key rate manipulation. Long rates are more influenced by the situation of public finances or even inflation expectations.
The easing of Treasury financing conditions in recent years is therefore partly due to the improvement in public finances following the slippage of 2012 when the budget deficit widened to more than 7% of GDP. In addition, inflation has averaged 1.2% over the past ten years, including a peak of 1.9%.
Credit to the economy and the stock market more sensitive to a monetary policy shock
According to simulations carried out by central bank researchers[1], a rise in the interbank rate has a negative impact of 0.2% on real GDP growth in the fifth quarter following the shock. On the other hand, the effects on inflation are immediate.
This recorded a fall of between 0.1 and 0.2% in the first six quarters following the shock. They disappear completely at the end of the 12th trimester, note the experts. On the other hand, the effects of a monetary policy shock are more marked on credits to the economy and the stock market.
In emerging or developing economies, the spread is mixed, even very weak, whereas the effects are significant and the transmission times to GDP and inflation are much shorter in developed countries. The results of the study suggest that Morocco is positioned at the border of the two groups of economies.
[1] Analysis of monetary policy transmission channels in Morocco, by Hicham Bennouna, Kamal Lahlou and Anas Mossadak
F.Fa / ECO Inspirations
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