UPDATE 1-Morocco to start targeting inflation in 2016

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RABAT, Dec 22 (Reuters) - Morocco will start targeting inflation in 2016 along with a planned more flexible currency exchange system, the central bank head said on Tuesday.

In April this year, the bank reduced the euro’s weighting in the currency basket used to set the dirham’s exchange rate, aiming to make its currency regime more flexible, as recommended by the International Monetary Fund (IMF).

The IMF, which gave Morocco a $5 billion credit line last year to help it puruse economic reforms, has urged Morocco to move towards more exchange rate flexibility to make its economy more competitive and able to absorb shocks.

The bank may take the decisions on starting inflation targeting and the launch of a more flexible currency exchange system as soon as the first quarter of 2016, central bank governor Abdellatif Jouahri told Reuters.

“We think to start targeting inflation in concomitance with a more flexible currency regime,” he said. “It might happen in the first quarter of 2016, but we will decide later on the final timing,” he added.

The dirham is still mostly pegged to the euro but the single currency’s weighting fell to 60 percent from 80 percent last April, while the dollar’s weighting rose to 40 percent from 20 percent.

As part of financial reforms, the government proposed in February a draft law that gives the central bank much more independence and prepares it for major financial reforms.

Morocco will also allow the creation of Islamic banks and insurers and enable private firms to issue Islamic debt in 2016.

Reporting By Aziz El Yaakoubi; Editing by Angus MacSwan