Depreciation of the euro against the dollar: BCV forced to raise interest rates

Depreciation of the euro against the dollar: BCV forced to raise interest rates
Depreciation of the euro against the dollar: BCV forced to raise interest rates

Africa-Press – Cape verde. With the increase in interest rates in the Euro Zone and the devaluation of the euro against the dollar, the Banco de Cabo Verde is obliged to review its monetary policy due to the PEG it maintains with the European currency and, consequently, to increase interest rates of reference. With these two situations, the Government will, in turn, have to create cushions to prevent imported inflation from affecting even more the income of families.

The Bank of Cabo Verde is in an uncomfortable situation, following the decision of the European Central Bank (ECB), which increased interest rates by 75 basis points, which began to take effect yesterday, Wednesday, 14.

As a result, the BCV will inevitably have to raise interest rates, taking into account that in Cape Verde’s exchange rate regime, with a fixed parity with the Euro, we have to follow the ECB’s rates.

As far as THE NATION was able to learn, Cape Verde cannot have lower rates than the Euro Zone. Due to the freedom of movement of capital and the excess of liquidity existing in the banking system, the maintenance of the current situation translates into an increased risk for the country’s foreign exchange reserves.

According to an economist contacted by A NAÇÃO, the current configuration of BCV interest rates is “anomalous”, in light of the latest changes in ECB rates.

This is because, due to the freedom of movement of capital, which can be exploited mainly by commercial banks, and the fixed parity rate, in Cape Verde, one cannot have a liquidity provision rate (0.50%) lower than the deposit rate in the Euro Zone. (0.75%).

“Has the BCV lacked the ability to anticipate events, or is it asleep at the wheel?”, asks our interlocutor.

BCV on alert

Asked by A NAÇÃO about the implications of the ECB’s decision to increase interest rates by 0.75%, the BCV said that its impact on the Cape Verdean financial system, for now, “will depend on the size of the increase, which can , or not, lead to a tightening of monetary conditions and, therefore, this situation may lead the BCV to review the orientation of its monetary policy due to the PEG with the euro”.

According to the central bank, from an economic point of view, an increase in interest rates “may cause an increase in savings and a reduction in consumption”. On the other hand, “we may eventually benefit from a potential reduction in imported inflation, in the context in which this measure results in inflation control”.

ECB raises key rates

The European Central Bank decided to raise interest rates by 75 basis points, with effect from this Wednesday, 14th. The refinancing rate is now set at 1.25% and deposits at 0.75%. The last increase in key rates, in July, was 50 basis points, but several analysts had already expected a larger increase this time, to control the rise in inflation in the Eurozone.

This is the first time since 1999 that the ECB has opted for an interest rate increase of this size, although it is the current practice this year in several monetary authorities. The rise announced in July was historic, being the first time that the central bank decided to raise interest rates in more than a decade, ending negative interest rates in the Eurozone.

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