Morocco’s central bank, Bank Al-Maghrib (BAM) will hold its key policy rate at 2.25 pc in 2019 due to subdued inflation and a neutral shift in US Fed policy, says Fitch Solutions in its latest report on the North African Kingdom.
In a bid to protect foreign exchange reserves and limit imported inflation, BAM will sustain its current interest rate differential with the European Central Bank (ECB), implying one 25 basis point hike in 2020, explain the analysts of Fitch group.
They revised down 2019 average inflation rate forecast for Morocco from 1.3 pc to 1.1 pc to reflect sluggish oil and food price growth. On a year-on-year basis, the January and March 2019 consumer price index (CPI) headline readings signaled deflation, bringing the Q119 average inflation rate to -0.2 pc.
The oil & gas experts of Fitch have revised down their 2019 Brent price forecast from $75.0 per barrel (/bbl) to $73.0/bbl, implying just a modest uptick in fuel prices from the 2018 average of $71.7/bbl.
Adding to the downside pressure on inflation is the subdued outlook for food prices, the wheat prices in 2019 are expected to fall below the 2018 average, pointing to significant deflationary pressures in the Food & Drink component of the consumer goods basket. This means that the overall 2019 average inflation rate will be around 1.1 pc.
According to Fitch Solutions, Morocco maintains a crawling peg to a basket of currencies (60.0 pc EUR, 40.0 pc USD) – allowing for a 2.5 pc movement either way. This strategy, combined with sluggish price growth in the coming quarters, will enable the BAM to hold its policy rate in 2019.
“We expect the BAM to begin its tightening cycle in 2020 with one 25 basis point (bps) hike”, stress the analysts of Fitch, noting that the gradual pace of Morocco’s currency reform indicates that the BAM will likely continue to broadly follow the ECB’s interest rate trajectory over the medium-term in a bid to protect the Kingdom’s foreign exchange reserves and keep the currency stable given strong trade links.
Fitch expects oil prices to average at $80.0/bbl in 2020 – up from $73.0/bbl in 2019, which implies higher transportation costs.
Furthermore, a widening differential between the BAM and ECB policy rates would most ¬likely stimulate depreciatory pressures on the Moroccan Dirham – which would exacerbate the upward pressures on inflation, say Fitch analysts.