BAM maintains key interest rate despite investors' speculation of a rise

Bank Al Maghrib’s (BAM) Board decided to keep the national key rate unchanged at 1.50% while continuing to closely monitor domestic and international developments.

In its statement, the Central Bank explains its decision to maintain the accommodative stance of monetary policy and, to continue supporting economic activity, saying it has “already integrated into its forecasts the impact of decisions taken under the social agreement of April 30, 2022.”

The external nature of inflationary pressures and the expected return of inflation to moderate levels in 2023, were also cited as reasons behind the BAM’s decision, which was unexpected to many financial and economic actors.

Inflation is projected to reach 5.3% for the whole of this year before decelerating to 2% in 2023, while its underlying component would reach 5.2% in 2022 and then return to 2.5% next year, said the bank.

Prior to this anticipated announcement, Morocco’s business and finance circles were eagerly waiting for the central bank’s decision regarding the national key interest rate, following expectations from both investors and financial rating companies of a possible rise.

Abdellatif Jouahri, Wali of Morocco’s Bank Al-Maghrib (BAM) chaired the second Board meeting for this year this afternoon. The highly anticipated council meeting will take place in the midst of a particular context for the country’s economy.

With raging inflationary pressures, the likes of which Morocco has not experienced for at least thirty years, and an uncertain international climate heavily disrupted by the COVID-19 pandemic and the ongoing Ukraine war, the Moroccan economy is suffering repetitive blows which have lingered despite the government’s curbing mechanisms.

Foreign investors have therefore anticipated a possible rise of the national key interest rate, to mitigate an overheating national economy fueled by international inflation and geopolitical instability.

Cautious, BAM had avoided increasing the national key interest rate for as long as it could, considering that if inflation rises too quickly, it can devalue a nation’s money quicker than interest rates can compensate savers. However, investors and financial agencies alike were expecting today’s council to approve the rate increase.

“At the end of this exercise, the consensus among financial investors is for BAM’s policy rate to remain stable, but the expectations of the increase of the key rate are increasingly visible at the level of the obtained responses,” indicates AGR in its last document, “Research report strategy.”

In more detail, 63% of investors surveyed anticipated a status quo of the key rate of BAM at the end of its next board, scheduled for June 21, 2022 against 88% previously, says the same source, noting that this survey was conducted among a sample of 35 investors considered among “the most influential” of the Moroccan financial market.

In analyzing the responses obtained by categories of investors, AGR analysts note “divergent” opinions between, on the one hand, local institutional investors, and on the other hand, foreign investors, noting that the share of institutional investors anticipating a status quo of the key rate stands at 94.

The share of foreign investors expecting a rise in the key rate in June 2022 is 83%, while the share of reference actors expecting the rate to remain stable is 57%.

The European Central Bank’s governor announced that the ECB intends to increase the interest rate by 25 basis points in July. Speaking at the European Parliament this Monday, Christine Lagarde said the bank may also make another raise in September.

“The calibration of this rate increase will depend on the updated medium-term inflation outlook,” she stated.

According to Fitch Ratings, the ECB’s decision would have encouraged BAM to follow suit. “We expect lending rates to increase in 2022–2023 due to increasing credit risk and inflationary pressures,” said the agency in a recent report.

“A rate rise could be triggered by the increase in the ECB’s policy rate planned for July 2022, or by further increases later in 2022, given that the Moroccan dirham is pegged to a currency basket weighted 60% to the euro and 40% to the US dollar,” estimates Fitch Ratings.

Morocco’s central bank was therefore highly expected to increase its policy rate in 2022 as real interest rates have been negative since October 2021.14