The Banky Foiben’i Madagasikara (BFM), Madagascar’s central bank, has decided to raise its key interest rate from 12% to 12.5% amid growing concerns over rising inflation. The decision, announced following a meeting of the central bank’s Monetary Committee, reflects its efforts to strengthen inflation control while avoiding excessive pressure on economic activity and access to financing.
According to data released by the BFM, inflation reached 8.6% in June 2026, up from 6.8% at the end of March. This increase confirms a renewed rise in price pressures after a period of moderation. More significantly, core inflation, which excludes some of the most volatile components such as rice and energy, reached 11.4%. This suggests that inflationary pressures are not limited to a few specific products but are becoming more widespread across the economy.
Against this backdrop, the central bank aims to strengthen its monetary policy in order to gradually bring inflation closer to its medium-term target of 5%. Raising the key interest rate is one of the main tools available to the BFM to influence monetary conditions and limit excessive expansion in demand and credit.
However, the decision comes at a particularly challenging time for Madagascar’s economy. A tighter monetary policy can help slow inflation, but it can also make borrowing more expensive for businesses and households. Higher interest rates may affect investment decisions, access to credit and, more broadly, companies’ ability to expand their activities.
For households, the impact of inflation is already significant. Rising prices reduce purchasing power, with the greatest consequences for the most vulnerable families. Businesses are also facing higher production costs and potentially higher financing expenses, which could delay investment projects and limit job creation.
One of the key challenges will therefore be the transmission of monetary policy through the banking system. Despite the increase in the key interest rate, liquidity remains relatively high in Madagascar’s banking sector. In June, the money supply had increased by 15.1%, partly driven by changes in net foreign assets, while bank lending grew by only 8.8%. This highlights a paradox: financial resources available within the banking system are increasing, but their conversion into credit for the real economy remains relatively limited.
Under these circumstances, the effectiveness of the rate increase will partly depend on the behavior of commercial banks. If banks make limited use of central bank refinancing facilities, the direct impact of the higher policy rate could be reduced. The challenge is therefore not simply to control the amount of money circulating in the economy, but also to improve the allocation of available financial resources toward productive sectors.
This is where government initiatives aimed at supporting economic financing become particularly important. The Ministry of Economy and Finance is seeking to complement monetary policy through mechanisms designed to improve access to financing for small and medium-sized enterprises, entrepreneurship and productive activities. Programs such as the National Industrial Development Fund (FNDI) and FANDROSO are intended to contribute to this objective.
For the authorities, the challenge is therefore to strike a balance between two objectives that can sometimes appear contradictory: maintaining price stability while preserving the conditions needed for economic growth. Insufficient action against inflation could prolong the erosion of purchasing power and further undermine macroeconomic stability. Conversely, excessive monetary tightening could restrict access to credit and weaken private investment.
The decision to raise the key interest rate to 12.5% therefore sends a clear signal of caution to economic stakeholders. The BFM is seeking to contain inflationary pressures and preserve the credibility of monetary policy, while the government must ensure that businesses, particularly SMEs, continue to have access to the financing they need to grow.
Madagascar’s next challenge will be to assess the impact of this new monetary policy stance on prices, bank lending, investment and economic activity. The success of the strategy will depend not only on the BFM’s ability to gradually bring inflation back toward its 5% target, but also on the implementation of mechanisms capable of directing available liquidity more effectively toward the real economy.
