Cape Verde's central bank cut its policy rates along with its reserve requirement to increase the flow of credit to the economy and thus provide "an additional boost to real GDP growth," help raise the rate of inflation and fight "the scenario of deflation."
The Bank of Cape Verde, which reduced its policy rate by 200 basis points in 2014, cut its policy rate by 25 basis points to 3.50 percent, which lowers the standing lending facility rate to 6.50 percent from 3.75 percent and the absorption facility rate to 0.25 percent from 0.50 percent.
The reserve requirement was also cut by 300 basis points to 15.00 percent. The bank's decision was announced on Feb. 13 and the new rates will take effect on Feb. 16.
After relatively high inflation rates in 2011 and 2012, Cape Verde's inflation has been on a downward trajectory from the second quarter of 2013 and the central bank is projected persistent deflation in 2015 due to the fall in international oil prices.
The deflation in consumer prices is compounded by a slowdown in demand and could exacerbate the inefficiency of the monetary transmission and have a very negative effect on economic activity, the central bank said.
Cape Verde's inflation rate was minus 0.4 percent in December, the ninth month in a row of deflation, but the bank said there was no evidence that consumers were postponing consumption in the expectation that prices will continue to fall, one of the negative effects of persistent deflation.
Cape Verde comprises an archipelago of 10 volcanic islands off the coast of Western Africa.