Monetary Policy Framework
Preamble
- At the last session of its Monetary Policy Committee (MPC) held on April 17, 2017, the Banco de Moçambique, introduced the monetary policy interest rate, or MIMO rate for short. Since then, it has been used as the main instrument for communicating monetary policy decisions. This change signified the cessation of the monetary targeting regime, which in this case had the monetary base as the operational target. It should be noted that the monetary targeting regime proved to be ineffective, not only in achieving inflation targets, but also in communicating with the general public, leading to a reduced effectiveness in influencing the decisions and expectations of economic agents.
- The monetary policy interest rate was introduced to improve the monetary policy transmission mechanism by signaling the policy stance more clearly and directly, through a variable that influences decisions between spending and saving.
Objective
- Article 3 (1) of Law No. 1/92 of January 3, the Organic Law of the Banco de Moçambique outlines that the main objective of monetary policy is to preserve the value of the national currency. This means keeping inflation low and stable.
- Low and stable inflation is desirable because it:
- Protects the purchasing power, particularly of the most disadvantaged consumers, with limited investment/protection options;
- Reduces uncertainty regarding relative prices, giving investors greater confidence in the choice of areas to invest;
- Reduces uncertainty with regard to real interest rates, thereby encouraging savings and investment;
- Facilitates the anchoring of economic agents' expectations over a broader time horizon;
- Contributes to a more stable financial system; and
- Helps maintain stability and social cohesion.
Regime
Since April 17, 2017, the Banco de Moçambique has been operating under a “monetary policy regime with an implicit nominal anchor.” Under this regime, the Banco de Moçambique has a medium-term inflation target, in the form of a band, which is in a single digit.
Operational Target
The operational target of the monetary policy of the Banco de Moçambique is the effective MIMO rate, which is the average of the interest rates at which the banks participating in the Interbank Money Market (IMM) exchange liquidity between themselves, for maturities of one working day (overnight), as weighted by the weights of various bilateral transactions.
Main Instrument of Monetary policy
- Open market operations are the main instrument for the implementation of monetary policy by the Banco de Moçambique. Through these operations, the bank sells/ buys public debt securities from/to the IMM participating banks, with or without repurchase and resale agreements, thus regulating liquidity conditions in the market. These include:
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- Sale/purchase of overnight maturity securities, with repurchase/resale agreements, i.e., overnight reverse repo and overnight repo. Such transactions are aimed at ensuring that the effective MIMO rate revolves around the MIMO rate.
- Sale/purchase of securities with maturities greater than overnight, with repurchase/resale agreements, i.e. reverse repo and 7-day repo, respectively. They are aimed at managing the structural liquidity of the IMM.
- Reserve requirements also comprise the monetary policy instruments of the Banco de Moçambique, consisting of the proportion of customer deposits that banks are required to hold at the Banco de Moçambique, in order to adjust bank liquidity to the objectives of price stability in the medium term.
- Moreover, within the IMM, the Banco de Moçambique regularly issues Treasury Bills, and may also intervene, in extraordinary circumstances, by means of other operations to mop up or provide liquidity, taking into account the objectives of monetary policy and financial stability.
Standing Facilities
- The Banco de Moçambique provides IMM participants with two overnight windows in which, on their initiative, they can access the Bank's funds or invest idle liquidity at fixed rates. The facilities are as follows:
- The Standing Lending Facility (SLF), through which participants can borrow from the Banco de Moçambique to meet their daily liquidity deficits. The SLF interest rate is the highest in the IMM; and
- The Standing Deposit Facility (SDF), through which participants can invest daily liquidity surplus at the Banco de Moçambique. The SDF interest rate is the lowest in the IMM.
- The SLF and SDF interest rates form the IMM interest rate corridor, which aims to limit daily fluctuations in interbank interest rates and to streamline interbank transactions.
Decision-Making Process
- Monetary policy decisions are taken by the MPC which meets every two months. However, whenever deemed necessary, the MPC may hold extraordinary meetings.
- As monetary policy decisions influence the economy, and inflation in particular, with a lag, the MPC adopts a monetary policy stance based on a forward-looking assessment of inflation, as well as the risks and uncertainties associated with projections, over a reasonable time horizon, which makes it possible to make policy decisions in advance and anchor the expectations of economic agents.
- Monetary policy decisions consist of setting the MIMO, SLF and SDF interest rates, as well as the reserve requirement ratio, consistent with price stability over the medium term.
Monetary Policy Implementation
The day-to-day practical implementation of monetary policy is carried out by the department responsible for managing the IMM.
Communication
Monetary policy decisions are communicated by a Press Release published on the Bank’s website, on the same day that they are taken. In addition, the Banco de Moçambique may hold a Press Conference, at which the Governor announces the measures and answers questions from the press. The conference also takes place on the same day that decisions are made.