Monetary Policy Committee (MPC) Statement of the 04th February, 2025

The Monetary Policy Committee (MPC) of the Central Bank of Lesotho (CBL) held its 111th meeting on the 4th of February 2025. The Committee assessed recent global, regional, and domestic economic and financial market developments to guide its policy decisions.

The January 2025 World Economic Outlook (WEO) update by the IMF projects global economic growth to be 3.3 per cent for both 2025 and 2026. This projection is based on modest upward adjustments to US growth, driven by strong wealth effects and a less restrictive monetary policy stance. However, weakened manufacturing activity and policy uncertainties, particularly in Germany and France, are expected to weigh on these projections. Additionally, risks to growth persist due to trade policy uncertainties, renewed inflationary pressures from potential trade tariffs, intensifying geopolitical tensions, and subsequent increases in commodity prices.

In the fourth quarter of 2024, economic activity varied across selected advanced and emerging market economies. Both the UK and the US economies slowed down due to weaker investment and external demand. The Euro area stagnated due to weaker consumer demand and trade challenges. Conversely, Japan’s economic recovery was underpinned by stronger wage growth. China’s economic activity expanded mainly due to stimulus packages and strong domestic demand, while robust services and infrastructure investment supported India’s growth. South Africa’s economy was expected to rebound, mainly supported by normal agricultural production and stronger consumer spending.

Labour market developments remained relatively stable in selected economies during the fourth quarter of 2024. Unemployment rate in the US stayed at 4.1 per cent, reflecting balanced gains from healthcare with layoffs from manufacturing. Meanwhile, overall unemployment in the euro area remained stable, although youth unemployment remained a persistent concern.

In December 2024, inflation rose in the US and in Japan mainly due to higher energy, food and housing costs. Meanwhile, the rise in inflation in South Africa and the euro area was primarily due to rising costs of services and utilities. Most central banks kept policy rates unchanged, except for the European Central Bank and the South African Reserve Bank, which cut their policy rates, while the Bank of Japan raised its policy rate. Short-term yields fell due to lower interest rates, while long-term yields rose.

Domestic economic activity was estimated to have expanded by 3.1 per cent in November 2024, up from 1.5 per cent in the previous month. This growth was primarily driven by stronger domestic demand, supported by both consumer spending and robust export growth. Despite challenges in the construction subsector, expansion was broad-based. Looking ahead, growth is expected to remain steady but uneven in the medium term, amid uncertainty in the export market.

The domestic inflation rate eased to 3.7 per cent in December 2024 from 4.4 per cent in the preceding month. This mainly reflected declining food and fuel prices in the international market, which were supported by stronger currency.

Broad money supply increased in the fourth quarter of 2024, driven mainly by a rise in transferable deposits held by the business sector. Private sector credit also expanded, reflecting higher lending to both households and business enterprises.

Government budgetary operations recorded a deficit of 4.8 per cent of GDP in November 2024, driven by a decline in revenue that outpaced the reduction in expenditure. Meanwhile, the public debt stock as a percentage of GDP rose to 56.2 per cent from a revised 55.7 per cent in the previous quarter, reflecting disbursements for ongoing foreign-funded projects.

Between the previous meeting in November and today’s sitting, the CBL’s Net International Reserves (NIR) increased by approximately US$42 million. This was mainly driven by higher SACU receipts during the review period. At current levels, the stock of reserves provides for 4.7 months of import cover. The NIR position is projected to remain steady and strong in the near to medium term.

In summary, global growth showed moderate progress in 2024 that is set to be maintained looking ahead into 2025. However, the intensification of protectionist policies remains a major risk. Domestically, growth is expected to be underpinned by construction-related activities in the medium term, amid growing uncertainty on the global stage.

Against this backdrop, the MPC took the following decisions:

To increase the NIR target floor from US$770 million to US$840 million, to ensure sufficient reserves for sustaining the one-to-one peg between the loti and the rand; and

To lower the CBL rate by 25 basis points to 7.25 per cent per annum, to align with prevailing domestic economic conditions and the broader regional monetary policy environment.

The Committee will continue to monitor global economic developments and their impact on the domestic economy, with a particular focus on the net international reserves (NIR) and will respond as necessary.

E M Letete (Ph.D.)
GOVERNOR
Contact Person: Ephraim Moremoholo
+266 22232094 / 58880647
emoremoholo@centralbank.org.ls