Modest Monetary Tightening in Morocco From 2018


Monday, November 13, 2017 10:25 AM / BMI Research


BMI View: Bank Al-Maghrib will initiate a gradual hiking cycle in Morocco from 2018 onwards, in order to moderate increasing inflationary pressures stemming from rising commodities and food prices. Higher rates will also help support the value of the dirham, as the Moroccan government is seeking to introduce greater exchange rate flexibility.


We expect an uptick in inflation in Morocco in 2018, as food prices recover from their 2017 slump, and as rising oil prices push transport and utilities costs up. This will encourage Bank Al-Maghrib (BAM) to start hiking interest rates from 2018 onwards, a move which will also be encouraged by BAM's willingness to support the exchange rate, especially as it seeks to gradually liberalise the dirham. We forecast one interest rate hike of 25 basis points (25bps) in 2018, taking the policy rate to 2.50% at the end of the year, after staying on hold throughout 2017.


We forecast consumer price inflation to accelerate from an estimated 0.9% in 2017 to an average of 2.1% in 2018. This will be largely driven by food prices returning to positive growth. In the first eight months of 2017, food inflation averaged -0.3% y-o-y, as the recovery in the agricultural sector reduced the volatility in food prices. We now expect the situation to normalise in 2018, especially as our Agribusiness team expects an increase in grain prices over the course of the year.


Rising energy prices – our Oil & Gas team forecasts Brent prices to average USD57.0 per barrel (/bbl) in 2018, up from an estimated USD53.5/bbl in 2017 – will also push utilities and transportation prices higher over the coming quarters. That being said, inflationary pressures will remain manageable, as the recovery in commodities prices will only be gradual, and a number of prices are still managed by the government.


Facing rising inflationary pressures, BAM will start hiking rates in 2018, although at a modest pace, as we forecast one 25bps hike in 2018 and another one of similar magnitude in 2019. In addition, gradual monetary tightening will be positive to support the dirham, which has a crawling peg to a basket of currencies (60% euro; 40% dollar). As such, we believe that BAM's monetary policy will fall between the US Fed's and the European Central Bank's cycles.


BAM has not followed the Fed's hikes throughout 2017, but we now forecast it to implement modest hikes, especially as it is trying to gradually introduce greater flexibility in the exchange rate (see 'Smooth Path Towards Greater Exchange Rate Flexibility', April 6). Indeed, widening interest rate differentials could raise fears of disorderly depreciation once BAM introduces more flexibility, potentially fuelling speculation over the dinar.


Due to the small magnitude of hikes, we believe that the tightening cycle will have a limited impact on credit demand and liquidity in Morocco, which, in turn, limits risks for economic activity. BAM has, consistently, lowered interest rates since 2008, but this has not resulted in an acceleration of credit demand in the country. Therefore, we see limited risks posed by modest hikes on the Moroccan economy.

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