Inflation has become a preoccupation for central banks, which since the first quarter of this year declared a state of emergency with the aim of achieving consumer price targets in the markets. Therefore, the decision was to increase interest rate, which often hits, but also disappoints.
With the spread of the problem of financial inflation around the world, many countries resorted to raising the interest rates as a measure to curb inflation. It was led by the US Federal Reserve, the European Central Bank, and the Bank of England first to raise interest rates almost a year ago with the aim of curbing inflation, which reached record levels not seen in the world. Likewise, Morocco decided to reduce interest rates to achieve the same goal, which lead to backfire .
Thus, it appears that raising interest rates may cause further issues beside curtailing the inflation. In the first place, the purpose of raising interest rates is to reduce liquidity in the market to slow consumption, which is the main way to reduce inflation in any economy. However, this resolution increases the burden of new and existing loans, which means that bank customers will think twice before taking out a loan, it also brings about increasing demands for depositing funds, decrease in investment rate, and a decline in the pace of spending of all kinds. All this, would certainly lead to slow economic growth rates taking into consideration the impact of financial and stock markets. To clarify further, I will set Moroccan experience to curtail inflation.
Morocco was able to engage in good inflation, which means an increase in wages in parallel with an increase in prices. It will be part of a series of harmless inflation, but it confirms that the reality is that the measures taken by the government to curb price hikes did not achieve the desired goals.
After it was growing steadily, bank loans recorded a slowdown at the beginning of the current year, in a manifestation of the decline in demand, which is likely to be the first effect of raising the main interest rate from Bank Al-Maghrib. The Central Bank had begun, in September of last year, to tighten monetary policy; raise the main interest rate. The bank continued to do so in December of the same year, and then during the month of March of this year, bringing the rate now to 3 percent. The central bank's move seeks to confront inflation, which has risen remarkably since last year, when it ended at 6.6 percent, and continued its jump at the beginning of the new year to 10.1 percent at the end of February, mainly driven by raising food prices and fuel . When the main interest rate rises, it makes commercial banks borrow from Bank Al-Maghrib at a higher rate; gradually , it was forced to raise the interest on loans directed to businesses and families.
The purpose of raising the interest rate is to reduce the demand for loans. As a result, household consumption and business investment fall, leading to a phase of contraction in demand ahead of supply and a phase of falling inflation.
However, according to Bank Al-Maghrib data, outstanding loans to the non-financial sector decreased by about 1 percent at the end of January, and continued to decline by 0.7 percent at the end of February. The decline was recorded in all types of loans, whether granted to the private sector or the public sector. While loans granted to households recorded stability. The outstanding loans to the non-financial sector in general reached 893 billion Durhams at the end of February, compared to 898.9 billion Durhams in January, i.e., a decline of 6 billion Durhams between January and February. During the second half of the current year, it is expected that the effects of raising the main interest rate will be evident on the interest applied by banks, and expectations are that it will reach 5 percent at the end of this year. Bank Al-Maghrib's policy of further hikes in the benchmark rate is dampening the pace of borrowing.
In addition to the impact of inflation on household purchasing power and the current mild growth season, raising rate interest procedure makes it difficult to meet the government's 4% economic growth target this year. Additionally, the citizens still suffer from skyrocketing prices in all commodities, small and medium business Entreprises were also the most affected.
Furthermore, an economic expert declared that raising the interest rate will not solve the problem of inflation and rising prices, rather, it will continue, Consequently , it will engender low growth rate, high unemployment rates , and the occurrence of what is called “stagflation" will occur, which means the situation is no longer economic, but turns mainly to be social.
According to a recent survey, 60% of households said their financial situation had deteriorated in the past 12 months. When asked about their expectations, only 18% said they expect their finances to improve in the coming months. According to the survey results, citizens' living conditions and confidence in the economy fall to the lowest .
In fact, the increasing interest rate decision proves its inefficiency, though some countries, including Morocco, stated that there is a slight decrease in inflation, yet some economic analysts claim completely the opposite,That the persistence of inflationary pressures raises the alarm about the outbreak of a new banking crisis, the proof lies in the continuous collapse of more banks over the world.
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Resources
https://www.cnn.com/2023/03/17/business/global-banking-crisis-explained/index.html
