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| 18 January, 2018

Morocco c.banker: FX move can raise inflation by 0.4% in "extreme case"

The move would improve people's purchasing power and estimated it would boost economic growth by 0.2%

Word Inflation on up trend arrow, with financial data visible on the background.

Word Inflation on up trend arrow, with financial data visible on the background.

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RABAT  - The flexible foreign exchange system introduced this week in Morocco could raise annual inflation by 0.4 percent "in an extreme case," while allowing faster economic growth, the central bank governor said on Thursday.

Abdellatif Jouahri said the move would improve people's purchasing power and estimated it would boost economic growth by 0.2 percent.

"It will be positive for growth," Jouahri told reporters.

The North African country has widened the band in which the dirham currency can trade against hard currencies to 2.5 percent either side of a reference price, from the previous 0.3 percent.

The system is part of the reforms recommended by the International Monetary Fund to protect the economy against external shocks and safeguard its foreign reserves.

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However, the dirham has hardly moved since against major currencies, easing concerns that it might see a sharp devaluation. The currency has firmed 0.25 percent to the dollar this week.

Jouahri said there had been no crisis to precipitate the shift, which he described as a "sovereign decision."

Morocco's finance minister Mohammed Boussaid said the first days of trading under the new rules showed that markets "trusted" the dirham.

The risk, however, is that any dirham weakness stokes inflation through relatively expensive imports of food, hurting the poor. Currently, inflation is projected to rise to around 1.6 percent in 2018 from 0.2 percent last year.

(Reporting by Ulf Laessing and Zakia Abdennebi; Writing by Sujata Rao; Editing by Hugh Lawson) ((Ulf.Laessing@thomsonreuters.com; Reuters Messaging: follow me on twitter @ulflaessing))