On March 1, the Bank of Cabo Verde (BCV) announced an increase in its key interest rates, raising them by 25 basis points. This adjustment, set to take effect on Monday, March 3, marks another step in the Central bank’s ongoing effort to align its monetary policy more closely with that of the eurozone.
In a statement explaining the decision, the BCV highlighted concerns about the persistent gap between domestic interest rates and those prevailing in international markets, particularly within the euro area. This disparity, the bank warned, poses a potential risk to the country’s official foreign exchange reserves and the stability of its fixed exchange rate regime, which is pegged to the euro.
Given these risks, the central bank reaffirmed its commitment to the monetary policy strategy outlined in December. The primary objective remains the gradual narrowing of the interest rate differential, thereby reducing the likelihood of capital outflows in search of higher returns abroad. By doing so, the BCV aims to safeguard the nation’s foreign currency reserves and ensure macroeconomic stability.
Under the revised policy framework, the main interest rate in Cabo Verde will increase to 2.5%. Additionally, the rate for the permanent liquidity provision facility will rise to 2.75%, while the interest rate on the permanent liquidity absorption facility will be adjusted to 1.95%. The rediscount rate will also see an increase, reaching 3.50%. Meanwhile, the minimum cash reserve ratio for commercial banks will remain unchanged at 10%.
The BCV’s Monetary Policy Committee is scheduled to reconvene on May 6 to reassess economic conditions and determine whether further adjustments are necessary. This latest rate hike follows a series of similar moves in recent months, including a 25-basis-point increase in November and a more aggressive 50-basis-point hike in January.
Beyond its exchange rate policy, the BCV closely monitors the country’s foreign currency reserves, as these reserves directly influence the number of months of imports Cabo Verde can sustain. Encouragingly, by the end of the year, this indicator showed signs of improvement, with reserve coverage rising to 6.3 months—an increase from 5.6 months in the previous quarter.