Rationale and Strategy
In recent years, the implementation of the monetary policy regime based on monetary targets has proven to be ineffective and inadequate to the stage of development of the Mozambican economy and the financial system. In particular, the rapid innovations in the domestic financial system have contributed to making the money demand and the money multiplier rather unstable. As a result, Banco de Moçambique has initiated a set of reforms to modernize the monetary policy instruments used to achieve the ultimate goal of the monetary policy.
As a part of these reforms, a monetary policy interest rate, known as the Mozambique Interbank Money Market rate or MIMO rate, was adopted on Abril 17, 2017. The introduction of the policy interest rate aimed to:
- Clearly signal the monetary policy stance to the market;
- Promote greater transparency in the process of setting the market interest rate and improve the monetary policy transmission mechanism. The policy interest rate provides financial market participants with a credible and stable anchor for determining retail interest rates, with emphasis on their credit products, and
- Improve communication regarding the monetary policy decisions. In contrast to an operational framework based on monetary targets, an interest rate based framework makes communication of the monetary policy stance with the public and markets clearer, thus allowing Banco de Moçambique to better anchor inflation expectations.
The Organic Law of Banco de Moçambique, defines the primary objective of monetary policy as preserving the value of the national currency, which is reflected in low and stable inflation. In pursuit of
its objective, the Law also establishes that Banco de Moçambique must contribute towards the Government’s efforts of promoting economic growth.
A low and stable inflation is desirable for it:
- Facilitates the anchorage of expectations of economic agents, companies, and the general public on a broader time frame;
- Eliminates uncertainties about future purchasing power, created by high price volatility , encouraging savings and investment habits, a condition for the economy to leverage its potential growth 1*;
- Ensures more attractive nominal and real 2* interest rates, thus improving access to bank credit for the poorest social groups, in addition to encouraging savings and investment;
- Promotes more efficient use of resources. Periods of high inflation are, as a general rule, followed by expending of significant resources on non-productive activities, as economic agents are led to invest in speculative activities in order to protect themselves from the negative impact of inflation;
- Protects the purchasing power, particularly of consumers in the lowest income category
In addition to the final objective of monetary policy, Banco de Moçambique recognizes the importance of ensuring stability of the financial system, so monetary policy decisions always consider risks to financial stability.
1* - Increases in resources available for lending (bank intermediation and direct financing) resulting from increased savings in the economy.
2* - Real interest rate is the nominal interest rate adjusted to expected inflation.
Banco de Moçambique operates under a monetary policy regime based on the use of the policy interest rate, the MIMO rate, as the main instrument for achieving the inflation target, previously established for the Government’s economic policy time horizon. The Bank considers this to be the most appropriate regime for the current situation, characterized by a certain vulnerability of the country to external shocks, fiscal pressures, the liquidity situation in the deepening interbank markets, in the face of a regulatory framework and monetary policy in modernization.
Whilst Banco de Moçambique recognizes that it influences the economy only with a certain lag, it adopts a monetary policy stance based on an assessment of the economic and financial prospects and their risks within a reasonable time horizon. Thus, in the process of formulating and implementing monetary policy, Banco de Moçambique bases its decisions, primarily, on its inflation forecasts. When the inflation forecasts deviate materially from the target set for the medium term, Banco de Moçambique takes appropriate policy measures to reverse this trend.
In addition, Banco de Moçambique makes projections regarding other sensitive indicators for inflation and financial stability, thus enabling, in a timely manner, an assessment of the liquidity conditions in the economy, the degree of insolvency, and the resilience of the financial system in the face of imminent risks and adverse shocks. These indicators signal future trends in the economy and the level of inflationary pressures.
Banco de Moçambique sets the MIMO rate and regulates the supply of bank reserves through open market operations - granting or taking liquidity from commercial banks through secured operations for 1- day maturity (repo or reverse repo) - so that the overnight interest rate of the interbank market, called the effective MIMO rate, fluctuates around the MIMO rate, decided at the Monetary Policy Committee meetings.
The policy interest rate is set within a corridor formed by the rates of the two standing facilities that the Banco de Moçambique provides to Interbank Money Market participants:
- Standing Lending Facility (SLF), through which the Banco de Moçambique provides overnight loans to banks with liquidity shortfalls against collateral. The SLF interest rate has a penalizing character for banks that resort to this financing window; and
- Standing Deposit Facility (SDF), through which banks deposit excess liquidity for overnight maturity against a remuneration offered by Banco de Moçambique.
The interest rate corridor is set so as to keep interbank market interest rates close to the policy rate and prevent high volatility of interest rates.
For the purposes of managing structural liquidity and providing investment alternatives for authorized institutions, Banco de Moçambique intervenes in the markets through instruments with maturities other than overnight, such as reverse repo between 7 and 364 days, Treasury Bills (TB) with maturities of 91, 182 and 364 days, and in outright purchases and/or sales of TB.
Commercial banks are subject to a flexible reserve requirement regime. This regime considers an average amount of reserves for a given compliance period, aiming to avoid high volatility of interest rates in the interbank money market. The MPC shall define the ratio and compliance period for reserve requirements, depending on the liquidity conditions of the economy and monetary policy and financial stability objectives.
Other monetary policy instruments available to Banco de Moçambique include moral suasion, as well as the purchase and sale of foreign exchange on the interbank foreign exchange market, in a context of flexible exchange rates.
In light of its market intervention strategy, Banco de Moçambique has a liquidity forecast model that enables liquidity absorption or provision actions with a view to bringing the interbank interest rate closer to the monetary policy interest rate (MIMO rate).
Monetary policy decisions are taken by the Monetary Policy Committee, which convenes every two months and may convene extraordinarily at any time, whenever macroeconomic conditions so require.
The MPC defines the MIMO rate based on an assessment of the domestic and international economic outlook, as well as its projections for inflation and other relevant macroeconomic variables, always weighing the risks and uncertainties associated with such projections and the economic environment.
In addition to setting the MIMO rate, MPC decisions include the interest rate levels for the standing lending and deposit facilities, as well as the reserve requirement ratio.
Banco de Moçambique places emphasis on transparency in the communication of its monetary policy. The MPC decisions are announced through a Communiqué and/or a Press Conference led by the Governor of Banco de Moçambique on the same day of the committee meeting. In the Communiqué, Banco de Moçambique would explain the rationality behind decisions taken, the risks and uncertainties involved, as well as the intended outcomes.
Banco de Moçambique also publishes the document that supports monetary policy discussion and