The instrument that “sets the tone” for the economy

Policy rate: The instrument that

Source : Map

18/03/2022 16:50

When it comes to talking “economy”, the key rate is on everyone’s lips. Often used, but sometimes misunderstood, the most famous of economic and financial instruments sets trends in growth and consumption. While its effects spare no economic agent and its slightest variation has consequences, this decimal number deserves to be deciphered.

Instrument reserved for the Central Bank. One of the main missions of the Central Bank of Morocco, Bank Al-Maghrib (BAM), is the development and implementation of monetary policy with the ultimate objective of preserving price stability. Among a panoply of instruments in its toolbox, BAM has first and foremost the key rate.

Concretely, it is the rate at which the first-tier bank, commonly known as the Central Bank, lends money to commercial banks or second-tier banks. By virtue of its main function, it is this base rate which determines the rates on the capital market.

The key rate thus makes it possible to maintain control over the money supply in circulation in order to control recessionary or inflationary dynamics. In a recession, slowdown in economic activity, lowering the key rate helps stimulate growth. Conversely, it is valued in the event of overheating to contain inflation.

The impact of the policy rate on the economy

As its name suggests, the policy rate affects the interest rates at which banks borrow money (deposit interest rates) and those at which banks lend money (debit interest rates), explains economist and foreign exchange policy specialist Omar Bakkou.

The impact of the key rate on deposit interest rates takes place through the following mechanism: when the Central Bank changes its key rate (let us assume downwards) this means that it undertakes to lend money to the banks at a reduced interest rate. Therefore, banks in turn will have to lower the rate of borrowing funds.

At the same time, the variation in the key rate (let’s assume it is downward) acts on the lending interest rates and therefore on the average total cost of banking resources, made up of free resources (sight deposits which are deposited by customers with banks zero interest rate) and expensive resources (time deposits).

This reduction in the cost of bank resources exerts downward pressure on the rates of bank loans to the economy (consumer loans, business loans, treasury bond rates, etc.), continues Mr. Bakkou in an interview granted at the MAP.

And to qualify that the lending rates practiced by the banks depend on several parameters, in particular the profile of the borrower (risk premium for non-repayment of the credit), the maturity of the credit and the degree of competitiveness of the banking sector which acts on trade margins.

By directly affecting the cost of credit, the policy rate therefore has the power to control national macroeconomic dynamics. Its manipulation can both stimulate and hinder growth depending on the provisions of monetary policy and economic conditions.

Health crisis: The key rate to the rescue of the national economy

Accommodating and proactive, the monetary policy initiated by BAM made it possible to absorb the repercussions of the pandemic by reducing the key rate by 25 basis points to 2% then to the current rate of 1.5% in June 2020, recalls the specialist.

This rate, which remains the lowest historically, constitutes an important component of the “monetary ease” policy adopted by BAM following the sudden stoppage of economic activity caused by the health crisis. The objective being for the Monetary Authority to support access to credit for businesses and households.

This policy includes a panoply of measures intended to improve banking resources, in particular the complete release of the bank’s compulsory monetary reserve account with BAM and the extension to a very wide range of securities and bills accepted by BAM in return for refinancing. granted to banks and the extension of their duration.

To support BAM’s efforts, other provisions have been adopted by the Professional Group of Banks of Morocco (GPBM) with the aim of facilitating the distribution of credit by banks to enable the safeguarding of companies and to maintain the power of purchase.

Noting that the GPBM has put in place a certain number of specific credit instruments, Mr. Bakkou cites, among others, the additional operating credit lines covering up to three months of current expenditure and the postponement of the maturities of depreciable credits and leasing.

These reductions in the key rate, coupled with the other monetary easing measures adopted by BAM, have made it possible to improve the financial situation of the banks, which has been strongly impacted by the health crisis. These include, among other things, the significant drop in free sources of funding for banks, namely demand deposits following massive withdrawals of money from customers and the increase in outstanding debts.

In terms of transmission of the effects of this policy on bank credit conditions, it was more complete for short-term credits (accounts receivable and cash credits) than for investment credits and real estate development, indicated the author of “The convertibility of the dirham in question: manifesto for the transition from a disordered convertibility to an ordered convertibility”.

This divergence is due to the economic situation and in particular its impact on the configuration of credit demand, he said, noting that accounts receivable and cash credits evolve at levels which are relatively high in times of crisis. , while equipment loans and real estate development loans generally follow a downward trend.

The post-pandemic period… Following the improvement in the health situation in the world, a surge in prices was observed. This imported inflation is mainly due to increased demand against supply limited by global supply difficulties. It nevertheless remains under control thanks to maintaining the key rate at 1.5% to preserve the purchasing power of citizens and create optimal conditions for economic growth.

Therefore, the centrality of the key rate as a monetary regulation tool no longer needs to be proven. Both a growth stimulant and a brake on inflation, the Central Bank rate is called upon to play a major role in the post-covid economic recovery already initiated by the Kingdom. Pending the next meeting of BAM, scheduled for next Tuesday, specialists remain mixed on a potential upgrade.

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