Inflation at all-time low in Angola makes it possible to reduce interest rates in 2013

15 October 2012

With the drop in inflation in Angola to less than 10 percent, which is an all-time low, interest rates may start falling at the beginning of 2013, according to the Economist Intelligence Unit.

The cementing of lower inflationary expectations, according to the EIU in its latest report on the Angolan economy, makes it possible to expect the Bank of Angola to lower interest rates in the first few months of next year, which would also be part of a strategy to increase credit to the economy.

“The domestic credit to GDP ratio reached 21.8 percent in 2011 and the bank will want to expand it in order to drive economic activity in the private sector,” said the EIU.

In September, the Bank of Angola reduced the permanent liquidity facility rate by 25 basis points to 11.5 percent.

It kept the base interest rate at 10.25 percent and permanent absorption facility at 1.50 percent.

The drop in inflation, the EIU said, will not be immediate, and the governor of the central bank has already warned that November and December are months that are affected by greater price pressures.

The EIU economists forecast average inflation of 10.3 percent this year, which is lower than the 11.4 percent seen in 2011.

In August, and after a drop for seven consecutive months, the consumer price index fell to 9.87 percent year on year, allowing the BNA to achieve its decades-long aim of achieving single-digit inflation.

Accumulated inflation since the beginning of 2012 is of just 5.26 percent and, at the beginning of September, the governor of the central bank, José Lima Massano, said that the country was on its way to slowing annual inflation down to 10 percent at the end of the year.

Pressure on prices in Angola slowed for reasons such as a drop in the price of goods worldwide, greater exchange rate stability, and the government’s decision not reduce fuel subsidies, the EIU said.

As well as this, the analysts also point to the introduction of a benchmark interest rate in October 2011 by the BNA.

This, “increased the efficacy of the monetary policy,” said the EIU, but its role in reducing inflation “should not be overrated.”

“The continued high level of dollarization in Angola and dependence on imports of consumer goods means that the stability of the exchange rate – supported by the recovery of foreign reserves – likely had a greater impact on limiting price pressure,” it said.

The EIU forecasts growth of 8 percent for the Angolan economy this year, which is more than the 3.4 percent posted in 2011.

Bolstered by recovery of production and prices on the international oil market, which drives the Angolan economy, growth is expected to remain high in 2013 despite slowing to 7 percent, the EIU said. (macauhub)