Monetary Policy in Angola | At least predictability

At the last meeting of the Monetary Policy Committee (CPM), members of the CPM decided to adjust reference interest rates upwards, in line with the acceleration of the inflation rate. The main decisions taken were the following:

·???????? Increase the BNA rate by 100 basis points to 18%;

?·???????? Increase the interest rate on the Permanent Liquidity Lending Facility by 100 basis points to 18.5%;

?·???????? Increase the interest rate on the Permanent Liquidity Absorption Facility by 400 basis points to 17.5%;

?·???????? Increase the coefficient of mandatory reserves in national currency by 100 basis points to 18%.

?·???????? Eliminate the custody fee on excess free reserves of Banking Financial Institutions, deposited at the National Bank of Angola.

The decisions are not being received unanimously by experts. What is normal. But it is important that everyone is aligned on the following point: MONETARY POLICY MUST BE, AT LEAST, PREDICTABLE. There can be no discretion in the management of monetary policy. Theory does not advise it, nor does the BNA Law itself, which when defining i) price stability; and, ii) the stability of the financial sector as a primary and secondary objective, respectively, advises CPM members to use all the instruments at their disposal to achieve the objectives that the Law defines.

Accordingly, the argument that the decision to increase reference interest rates could result in less credit for the economy and companies, in the medium term, has its reason for being. But it is important to recognize that, in the short term, it could be fundamental to correct expectations of exchange rate depreciation and help Interbank Monetary Market interest rates return to being within the Monetary Policy corridor, which is fundamental for effectiveness of Monetary Policy to achieve single-digit inflation in the medium term.

On the other hand, because for 2024 a further worsening of Monetary Policy by the BNA should be expected, largely due to the high inflationary pressure expected for 2024 - the IMF estimates inflation at 25.6%, while the Government estimates 15.6% - , led by the adjustment in fuel prices, the prospect of exchange rate depreciation and a high level of public debt execution, which should increase the money supply to levels close to or above the levels seen before 2020, above 30% of GDP.

Accordingly, reference rates and the Mandatory Reserve Coefficient in National Currency may be set above 20%, to reduce the possibilities of inflation intensifying due to the monetary component. And with a view to diluting the impacts of high adjustments in 2024, the process that began in November should have started in June 2023. But how does it sound to say: Better late than never!

Furthermore, it is important to highlight that Monetary Policy must be, above all, predictable. And this predictability is statutory and legal, that is, the BNA Law defines that the BNA's primary objective is price stability. And secondary objective is financial stability. And when inflation is accelerating, the Monetary Policy Committee must adhere to all the Monetary Policy instruments that the Monetary Policy Operational Framework has to ensure that prices stabilize. And that is what the BNA sought to do in the last decision. And this must be what the BNA must continue to do as long as inflationary pressure prevails.

We cannot ask the BNA to boost economic growth or job creation. This is not the BNA's mission. This is the Government's mission. We have to start being rigorous and coherent in our criticisms, so as not to demand from the BNA what is the responsibility of the Government.

There is a lot of debate, and rightly so, about the scope of restrictive Monetary Policy to contain inflation in Angola, which is, manifestly, supply inflation. We must remember that the transmission mechanism of the BNA's Monetary Policy is not just about consumption and private investment.

It is also about imports and public spending, that is, if the BNA manages to reduce liquidity with the worsening of Monetary Policy, indirectly, the BNA will be able, through the market and not through administrative means, to contain expectations of exchange rate depreciation and, therefore, drag, the cost of imported products – the less depreciation, and excluding the price of the product at origin, the lower the price of the imported product -.

And so, we will be ensuring that prices enter the national market with lower costs, which will translate into less inflation. On the other hand, the decision should reduce the State's appetite for taking on debt to incur expenses beyond its ability to finance itself, which reduces pressure on domestic demand and, consequently, pressure on the reduced supply of products.

Regarding the cost of credit, it translates into less national production. It is important to remember that, currently, more than 90% of new credits to the real economy are coming via Aviso 10 of BNA, which has fixed interest rates of 7.5%, so they are not affected by the current increase in reference interest rates.

Even better, there is even the possibility that the amounts of credit through Aviso 10 will increase, since the amount of Mandatory Reserves of Banco Comerciais held by the BNA should increase with the increase in the Mandatory Reserves Coefficient in National Currency of 17% to 18%, that is, banks will have more incentives to grant credit under Notice 10, as it will allow them to release more liquidity.

Finally, the measure should be read as an indication of what is to come, which is more exchange rate depreciation. And the BNA, when taking the decision to reduce liquidity in Kwanza in the market, will be giving indications that yes, there is room for more exchange rate depreciation, but it is not available to sustain that same depreciation.

And removing Kwanza from banks can help mitigate depreciation in currency auctions, as the fewer Kwanzas banks have, the lower the capacity of Commercial Banks to accept the purchase of debts with higher exchange rates from currency providers, which translates into less exchange rate depreciation and less inflation expectations.

To conclude, the inflation rate in the last seven months has been accelerating, having stood at 16.58% in October, against 15.01% in September. And the BNA estimates that by December inflation will rise to 19.5%. Accordingly, it is necessary to adjust monetary policy. Not only because this will ensure lower inflation expectations for the coming months, but above all to ensure a predictable monetary policy, which is essential to reduce unnecessary uncertainties.?