“Increase in interest rates is inconsistent with the objective of controlling inflation” – Mozambican economist

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“Increase in interest rates is inconsistent with the objective of controlling inflation” – Mozambican economist

12:43 CAT | 30 Sep 2016

Speaking to A Verdade in June, economist Oksana Mandlate said that the Bank of Mozambique’s increasing interest rate “is based on the assumption that inflation is linked to an excess demand in the economy, and aims to slow consumption and domestic investment. But in Mozambique’s case, the economy dependent on imports, and much of the inflation in consumer prices is imported, partly due to depreciation of the exchange rate”.

Image result for oksana mandlate — Oksana Mandlate (File photo)

After the central bank further raised the rates of reference interest rates in July, Mandlate, a research assistant in the Research Group on Economy and Development at the Institute of Social and Economic Studies (IESE), told @Verdade that “the policy option chosen by the Bank of Mozambique, the continued increase in the reference interest rates, creates a vicious cycle in the economy. This measure, as well as the containment of public expenditure, aims to curb inflation by slowing the economy. The measure has shown to have little effect and has high costs for the economy, because it does not address the real causes of inflation, such as the structural dependency of the economy on the import of basic consumer goods and inflows of external resources. However, the measure induces a redistributive effect on the economy, with negative effects on its productive structure”.

[This effect occurs] “first of all, through the State, since its domestic loans become more expensive. In 2013-2014 around 50 percent of government expenditure on interest rates was directed to domestic banks and close to 20 percent of the banks’ assets were invested in government debt. The “secret” loans have changed this picture, but they have also limited opportunities for the government to seek resources in foreign financial markets. The most expensive internal public loans will be paid by taxpayers, businesses and families, while reducing public spending means less employment and business opportunities will be created in the economy both for families and for businesses,” Mandlate explained.

“Increasing interest rates is inconsistent both with the objective of controlling inflation and the aim of increasing national production,” Mandlate concluded .

Source: A Verdade