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Mozambique: June deflation makes rate cut possible but risks remain – Oxford Economics

The deflation seen in June in Mozambique is due to declines in prices for food and transport, opening scope for a reduction in official interest rates, according to an analysis by Oxford Economics , a UK-based consultancy.

In a note sent to clients that Lusa has seen, analyst Gerrit van Rooyen predicts that average inflation this year will be below the 2.8% seen in 2019, carving out scope for the Bank of Mozambique to cut its benchmark lending rate by 1.5 percentage points by the end of this year, as the economy remains fragile and high interest rates remain relatively high.

Consumer prices in Mozambique fell 0.55% in June, according to figures released last week by the National Statistics Institute (INE).

Data for the last 29 months shows that the country tends to see month-on-month prices fall in the middle of the year: this happened in June 2018 (0.12%) and from May to July 2019 (0.31%, 0.23% and 0.31% respectively).

Also read: Mozambique: Inflation turns into deflation

Still, even as weaker domestic demand and lower prices for oil products this year help contain inflation, the risks are increasing, van Rooyen argues, noting that the metical has depreciated by almost 10% since the beginning of the year against the US dollar. As Mozambique is an importer of most consumer goods, a weaker currency is strongly associated with a rise in prices, he notes.

In addition, the analyst concludes, supply chain disruptions due to the impact of the Covid-19 pandemic, and the resulting product shortages, may also temporarily increase the prices of some consumer goods.

Source: Lusa via Club of Mozambique

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