How will the Central Bank’s decision to raise the key rate affect Moroccan citizens?

Manal Lakhal has been secretly planning and researching property loans to purchase her first home at the age of 27. With her upper echelon monthly salary, she has spent the last four years saving up for a downpayment on a small one-bedroom apartment on the outskirts of Rabat.

On Wednesday morning, she was scheduled to meet with her banker to see how the recent news of an increase in the national key interest rate will affect her journey to her home.

Lakhal’s banker told her that her dream house is still accessible to her, but that her monthly payments will slightly increase. Although by nothing she can’t afford, the rising cost of living, grim economic climate, and fluctuant times are making her reconsider her timing, as she navigates this new normal with her stagnant salary and few professional ascension prospects.

The current economic climate Lakhal and others are experiencing is tightening pressures on governmental and financial institutions to resolve the unprecedented inflation Morocco is experiencing.

Morocco’s central bank Bank Al-Maghrib (BAM) announced it is finally raising the key interest rate to 2%, a 50 basis point increase aimed at curbing the growing inflation in the domestic market.

BAM’s governor explained during a press conference later in the day that the increase became an evident “necessity,” adding that “it is better to pay a small price by acting quickly on inflation, rather than wait and see it become more widespread and lasting,” which would entail more “drastic measures,” he argued.

Why raise the key interest rate?

The key interest rate, also the policy rate, is a percentage set by central banks to fix the interest at which banks can borrow money from the central financial authority and ensure their liquidity.

Shifting the key interest rate is one of the main monetary policy tools of central banks, and it directly affects the interest all commercial banks apply to their customers. The rate is lowered to encourage activity in cases of low growth forecasts, or increased in case of rising inflation.

The effect of higher rates is to reduce demand for goods and services, and ease the pressure on prices. By raising the rate, the Central Bank is attempting to discourage loans and control the amounts of liquidity in circulation so as to prevent further price hikes and ease inflationary pressures.

Although BAM’s decision was relatively tempered, raising the key rate has a ripple effect on micro-economic actors, namely financial institutions, as their applied interest rates to both businesses and individuals will also increase.

How does the key rate increase affect individuals’ loans?

Economist and financial expert, Zakaria Garti said the BAM could no longer afford to maintain its “wait and see” strategy, considering the ongoing international economic context, where over 60 countries have made the decision to raise their key rates.

“Morocco could no longer refrain from acting on the key rate, considering how inflation is clearly not only temporary,” the economist told HIBAPRESS EN.

However, for Garti, the effect on this decision will mostly be on access and distribution of loans, which aims to contain the record price hikes of goods and services across the domestic market, as less money in circulation has a direct consequence on the prices of goods and services.

To the specialist, BAM’s monetary policies are now driven by the will to control a growing domestic and inflation in a context marked by little prospects for economic growth, which results in “stagflation,” which refers to an economic situation in which stagnation of economic activity (low economic growth and high unemployment) and rising prices (inflation) are combined.

This situation is contrary to what is observed in some Western countries such as in the United States of America, where the key rate increase was fueled by an increase in investment and a revived employment market.

Apart from less access and demand for loans and a decrease in money in circulation, Garti expects limited effects on citizens’ daily lives.

“Key rate manipulation has a much less direct effect on people’s lives in non-integrated financial markets such as in Morocco.”

When asked about how the 50-point increase will affect banks’ interest rates, bank sources told HIBAPRESS EN that consumers’ loan interest rates are only expected to rise by about 0.02%, depending on the type of loan and borrowers’ profiles.

The increase in the key rate will mostly affect larger loans, usually made by businesses for investment purposes, but banking professionals are reluctant to give exact estimates so soon.

The BAM Wali stated he will soon meet with bank presidents to implement this change, making sure to emphasize during his press conference that the new rates will exclusively be applied to new and future loans, saying that all contracts made prior to this increase will be unaffected by the change.

BAM’s governor has insisted that the monetary measure has one clear goal: containing the current, unprecedented inflation in Morocco in view of slow economic growth forecasts.

“Acting on citizens’ purchasing power does not fall within BAM’s responsibilities, it is that of the Government,” he said.

With the slightly hindered consumers’ access to loans, Morocco’s highest financial authority is trying to limit skyrocketing prices that, although were initially nothing but a mere passing imported ripple from international markets, which is now the new normal for Moroccan businesses, consumers, and all economic actors alike.

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