October 24, 2019 / 3:38 PM / a month ago

Market upbeat as Angola central bank lifts reserve ratio, drops FX fix

JOHANNESBURG, Oct 24 (Reuters) - Angola’s central bank has raised the rate of cash commercial lenders are required to hold in reserve, a move to ease inflation and stabilise the currency that was welcomed by analysts and markets.

The Bank of Angola (BNA) raised the cash reserve ratio (CRR) from 17% to 22% on Wednesday, and removed the 2% trading band that kept the kwanza in a fixed range. It kept the benchmark lending rate unchanged at 15.5%.

The kwanza’ s official rate has weakened more than 20% since the start of this month, but on Thursday the currency gained for the first time since those falls, albeit marginally, firming 0.4% to 449 per dollar.

On the parallel market the kwanza was trading about 35% higher than the official rate, at 610 per dollar. In mid-July, the parallel rate was about 45% above the official rate, analysts at Cape Town-based NKC African Economics said.

The kwanza’s massive depreciation and the ineffectiveness of tweaking benchmark lending rates, has ramped up the pressure on policy makers to target the official currency rate, analysts and traders said.

“It (BNA’s decision to raise CRR) could be a knee-jerk reaction with the currency weakening and the bank worrying about the impact on inflation. They had to tighten somehow,” said Africa strategist at Absa Samantha Singh.

“The last move by the BNA was cutting its policy rate to support growth, but given the move in the currency, it seems the bank has taken a more cautious approach and raised the reserve requirement,” Singh said, adding importers demand for dollars was also a big worry for the bank.

Falling growth has also put pressure on policymakers. The World Bank and IMF are plugging a financing need of around 3.5 trillion kwanza just for 2019.

The central bank imposed the “reference rate” when it abandoned the kwanza’ s peg to the U.S. dollar in January 2018, devaluing it at the time by about 10%. The reference rate failed to meaningfully curb inflation, however.

October consumer price growth stood at 16.08% in October, while foreign currency reserves have kept sliding.

“The decision to raise the reserve requirement may also have been triggered by net international reserves falling below the psychological $10m level,” said Gerrit van Rooyen, an analyst at NKC African Economics. (Editing by Tim Cocks and Alexandra Hudson)

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