Liberia’s central bank lowered its monetary policy rate by 500 basis points to 25.00 percent, saying this rate cut was indicative of its success in reducing inflation to an average of less than 25 percent in the first quarter of this year from slightly over 30 percent in October 2019.
It is the first rate cut by the Central Bank of Liberia (CBL) since it set the standing deposit facility rate (SDF) at 30 percent on Nov. 30, 2019 after transitioning to an interest rate-based monetary policy framework from exchange rate targeting in July 2019.
In a statement issued May 29 following a meeting of the bank’s board of governors on May 28, the bank’s board of governors also decided to continue issuing shorter tenor instruments of 2 weeks, 1 and 3 months, at an interest rate of 25 percent.
Liberia’s economy, which contracted 2.5 percent in 2019 due to an underperformance of non-mining sectors, is expected to be weighed down further by the COVID-19 pandemic while inflation is seen falling further to 19 percent in the second quarter of this year.
In November, 209, when CBL tightened its monetary policy and set the key rate at 30 percent, it also lowered the Liberian dollar reserve requirement to 15 percent from 25 percent and raised the U.S. dollar requirement to 15 percent from 10 percent.
The Liberian dollar is currently trading at 198.6 to the U.S. dollar, down 5.4 percent this year.
CBL switched to an interest rate policy framework from an exchange rate targeting framework at a time of low inflow of foreign exchange. An exchange rate framework requires major holdings of foreign exchange that can be used to defend the exchange rate.
Under the new monetary policy framework, CBL will use medium-term interest rates to transmit monetary policy decisions to control inflation and bring down the high prices of goods and services, especially food, which significantly affects poor people, something CBL in November said it was not happy with.
CBL also said then the success of the new framework will require the development of financial markets that are currently at a low level.
In November last year Liberia’s president, George Weah, named J. Aloysius Tarlue executive governor of CBL after Nathanial Patray retired as executive governor in October that year after he initiated several major reforms, including the development of the new monetary policy framework, strengthening the foreign exchange auction system and developing a financial inclusion strategy.
Tarlue was tasked with restructuring the central bank to tackle the country’s economy as it relates to price, exchange rate and financial stability.
The policy framework adopted in July will help prepare CBL to move toward inflation targeting, a policy that would be consistent with the convergency criteria of the monetary union of the Economic Community of West African States (ECOWAS).
ECOWAS is a regional political and economic union of 15 west African countries and includes the West African Economic and Monetary Union (WAMU), which use the CFA franc that is pegged to the euro.
Last year ECOWAS agreed to rename the CFA franc the eco and eight of these countries, mostly former French colonies and grouped in Wamu, plan to adopt the eco as a single currency under the auspices of the Central Bank of West African States (BCEAO).