Inflation and Growth: The Big Dilemma of Bank Al-Maghrib and Central Banks

Morocco, like all countries of the world, faces an idealized situation of the “prisoner’s dilemma”, formulated by game theory in the 1950s. A situation in which it is difficult for a player or economic actor to make a rational decision without creating Collateral damage Which will skew the whole game. And where the choice of the actor or player is summed up finally To make the “less is worse” decision…

This situation, which we have only seen in economics books, finance, chess or snooker games, in a very theoretical way, is experienced today by all the central banks of the world, including the Bank of Morocco.

The game here is simple. The task of a central bank, such as the Bank of Morocco or the European Central Bank (ECB), is to ensure price stability. Therefore, its entire policy must be aimed at this goal. However, inflation has returned for a year already, and in a spectacular fashion.

The rational reaction of the central bank would then be to use all the tools at its disposal to increase the cost of money, suck liquidity from the market, and create downward pressure on prices. This translates concretely to Increase in key rates or via policy management reservation In terms of asset repurchase or bank refinance, in order to accumulate the largest amount of liquidity in the market and alleviate demand. The decision is simple, and it was already made in the past, without major problems.

But the current context makes things very complicated. After two years of the covid crisis, including a year of great stagnation, the imbalance created between global demand and supply after the pandemic, and an uncertain future with the war in Ukraine, stagnation ghostor at least one low growth, airplane. With all the consequences for the economy: lower corporate profits, lower investment, higher unemployment, social inequality, poverty, public debt, etc.

Lowering Inflation or Supporting Growth: An Unsolvable Equation

Unlike the US Federal Reserve, Bank Al-Maghrib, like the European Central Bank, does not have a target in its mandate job creationTheir main task is to rein in inflation. But like any reasonable economic actor, these central banks cannot make the rational decision to raise their rates at the risk of slowing down the recovery machine and causing too great collateral damage to the rest of the economy.

What do you do next? Raising key rates to cut prices, but halting post-Covid economic recovery? Or maintain the status quo to allow the economic machine to breathe and let prices fall at the national level? The equation seems unsolvable, even by accepting eminent European economists and central bankers who no longer know what to do, creating a climate wait-and-see attitude, of skepticism and anxiety in economics.

Abdellatif during his last tour at the end of March on the occasion of the Board of Directors meeting of Bank Al-Maghrib First for the year 2022 jeweler He had expressed this dilemma clearly and frankly, and told the media that he cannot at the present time raise prices and raise the cost of money, and therefore prefers to support stimulus over low prices. It is clear that this board, which maintained the status quo on the key rate, has gambled by betting on the optimistic scenario of a return to normal inflation from the second quarter, as announced by several global financial institutions. This is also the case for the European Central Bank, which made the same bet at the last meeting of its governors on April 14, by keeping key interest rates stable.

The head of the institution, Christine Lagarde, like the governor of Bank Al-Maghrib, Abdellatif Jouahri, did not rule out a change in this policy if the scenario of persistent inflation over time was confirmed, and Jouahri announced that he could even call early tip to make the necessary decisions.

After the Federal Reserve announces color, will Pam’s bank follow?

That seems to be the case today. For a few months, central bankers were convinced that the price hike was temporary and resulted, above all, from bottlenecks from the recovery accompanying activity around the world. However, it is clear that this phenomenon appears to continue and grow.

The problem, said Karl Otto Ball, former president of Deutsche Bundesbank, is that “inflation is like toothpaste, once you’re out of the tube you can’t put it back in. Thus, it’s best not to press too hard on the tube.”

In the United States, the Federal Reserve, through its recent decisions, has clearly shown that it has abandoned the bet on temporary inflation.

to fight price hikes, The Federal Reserve raised its key interest rate last Wednesday by half a point, its largest increase in nearly twenty-two years, and announced that it will begin reducing its balance sheet from next month, thus accelerating Tightening its monetary policy in the face of inflation.

The target rate for federal funds, the famous “federal funds”, the main instrument of monetary policy of the Federal Reserve, rose between 0.75% and 1%. This decision was made in consensus It clearly shows the direction of the winds at the level of the largest economy in the world. The Fed does not intend to stop there, its board has indicated that further increases will be justified in the future.

A decision that indicates this Americans are convinced that inflation is here to stayAnd that the goal of stabilizing employment and supporting the economy is now ranked second, in the face of Inflation that erodes household purchasing power as well as institutional savings and investment. A difficult choice, but understandable when you know that the United States is in a position full employment. Far, far away, from the national scene, particularly in the young segment of the urban population, nearly half (45% according to HCP) is unemployed.

The Board of Directors of Bank Al-Maghrib is already preparing for its meeting June, So you will face a big dilemma. Ignoring the accelerating inflation in the country, which concerns not only energy products but also food products, will have consequences. On the other hand, violently raising prices to curb inflation would send a wrong signal to the economy, and could hamper the recovery machine as well as all government programs aimed at creating activity and employment. The situation was further complicated for the Board of Directors of Bank Al-Maghrib after the signing, the day before 1 May, of the social agreement between the government, unions and employers, which provided for significant increases in wages, as well as in both countries. In both the private and public sectors, it is admittedly a bit deferred in time.

A justified decision from the political point of view of the loss of purchasing power due to inflation, but in itself it contributes to maintaining demand at a high level, and thus maintaining the inflationary spiral.

How do you get out? How will Bank Al-Maghrib react? Will the Fed follow up by raising its key rate and shrinking the size of its balance sheet? Or will it stop by maintaining the status quo again for another quarter?

Between the inflationary shock, the uncertainty about growth with succession of crises and the massive needs for public finance, the Board of Directors of Bank Al-Maghrib has decisions … not the best, but the least bad.

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