Why Morocco's Interest Rate Reforms Are Working Better but Still Falling Short, According to IMF

Morocco’s monetary policy reforms have strengthened the impact of interest rates on inflation, economic growth and bank lending, but their effects remain slower than in other emerging economies. An IMF study highlights the need for deeper financial markets, stronger credit transmission and greater exchange rate flexibility to improve inflation control and economic stability.

Morocco's monetary policy reforms are beginning to strengthen the country's ability to control inflation, influence bank lending and maintain economic stability, although significant structural challenges continue to limit their effectiveness. A new study by researchers Nadia Mounir and Hannah Brown from the International Monetary Fund (IMF), Middle East and Central Asia Department, examines how monetary policy has evolved following major financial and institutional reforms. Published in October 2026, the research analyzes economic data from 2006 to 2025 and finds that interest rate decisions now have a stronger impact on economic growth and consumer prices than before 2018. However, their effects remain slower and weaker than those observed in many other emerging economies.

Interest Rate Reforms Are Strengthening Morocco's Economic Stability

The study reveals that Morocco's central bank, Bank Al-Maghrib, has become more effective in influencing economic activity through interest rate decisions. Following reforms introduced since 2018, an unexpected one-percentage-point increase in the policy interest rate reduces economic output by approximately 0.3 percent and inflation by around 0.12 percent.

Before the reforms, the same monetary tightening reduced output by only 0.1 percent and inflation by approximately 0.05 percent. This improvement suggests that changes in borrowing costs are now having a greater influence on economic activity and consumer prices.

However, the impact remains gradual. Economic output experiences its strongest response after approximately seven quarters, while inflation responds most significantly after eight quarters.

In comparison, similar interest rate increases in other emerging economies typically reduce economic output by 0.3 to 0.8 percent within two to six quarters and inflation by 0.2 to 0.3 percent within four to eight quarters.

The findings highlight that Morocco has made progress but still faces challenges in translating monetary policy decisions into faster economic adjustments.

Greater Currency Flexibility Is Changing How Monetary Policy Works

Morocco has introduced several reforms to modernize its monetary system and prepare for a future inflation-targeting framework.

A major institutional reform came in 2019 when legislation formally established price stability as the primary objective of Bank Al-Maghrib. The change strengthened the central bank's mandate and clarified its responsibility for managing inflation.

Authorities also increased flexibility in the Moroccan dirham's exchange rate. In January 2018, the permitted fluctuation band was widened from plus or minus 0.3 percent to 2.5 percent. It was subsequently expanded to 5 percent in March 2020.

These changes allowed the currency to respond more effectively to economic conditions and international market developments.

The research finds that monetary tightening now produces a more noticeable appreciation of the dirham, particularly against the euro. This indicates that exchange rates have become a more active channel for transmitting monetary policy.

However, the effects remain relatively temporary because capital controls, limited foreign exchange market development and the managed exchange rate framework continue to restrict currency adjustments.

Banks and Businesses Face Uneven Effects from Interest Rate Changes

Morocco's financial system depends heavily on commercial banks, with bank loans accounting for more than 80 percent of financial claims on the economy.

The researchers identify the interest rate channel as the strongest mechanism through which monetary policy influences financial conditions.

Changes in policy rates are transmitted to government securities, deposit rates and bank lending rates, with estimated pass-through ranging from approximately 50 percent to 120 percent within one or two quarters.

However, deposit rates absorb only around 60 percent of monetary policy changes, reflecting abundant low-cost deposits and limited alternative savings opportunities.

The effects also differ across borrowers. Corporate lending rates generally adjust faster than borrowing costs for small and medium-sized enterprises and households. Real estate loans respond more slowly because of longer repayment periods and lending arrangements.

Credit availability shows similar differences. Short-term loans and working capital financing respond more quickly to monetary tightening, while long-term lending remains less sensitive.

In 2025, short-term loans represented approximately 30 percent of total bank credit, compared with around 40 percent for long-term loans.

Services businesses experience clearer reductions in credit following interest rate increases, while agriculture and manufacturing show weaker responses, partly because of government support programmes and longer-term financing structures.

Food Prices and Weak Financial Markets Remain Major Challenges

One of the biggest obstacles to effective monetary policy in Morocco is the composition of consumer prices.

Food accounts for approximately 40 percent of the consumer price index, while regulated prices represent around 20 percent. These categories are influenced heavily by weather conditions, international commodity prices and government decisions rather than domestic borrowing costs.

Consequently, even substantial interest rate increases may take considerable time to reduce overall inflation.

The researchers also find that monetary policy has little measurable impact on stock market prices. Limited market liquidity, low household participation and concentrated trading activity weaken the role of financial markets in transmitting policy decisions.

Inflation expectations also adjust slowly, suggesting that financial market participants often respond to actual price changes rather than immediately adjusting their forecasts after central bank announcements.

The study concludes that Morocco needs deeper financial markets, stronger lending rate transmission, better foreign exchange infrastructure and clearer monetary policy communication to support its transition toward inflation targeting.

Although the reforms have improved monetary policy effectiveness, the researchers caution that the relatively short post-2018 dataset limits the precision of some findings and does not establish that the reforms alone caused the improvement.

For policymakers, the central message is that institutional reforms must be accompanied by stronger financial systems and more responsive credit markets to achieve faster inflation control, sustainable economic growth and greater resilience against external economic shocks.