A 45 minute-meeting at the government house between Mauritius Finance Minister Xavier Duval, and Bank of Mauritius Governor, Rundheersing Bheenick, put an end to the debate concerning the conduct of the monetary policy.

Duval and Bheenick have publicly disagreed in the last fortnight over whether to raise interest rates and over government borrowing and met for the first time on Tuesday since their clash became public.

The economic situation and the urgency of the action coordinated to mop the excess of liquid assets in the monetary circuit were the main theme of this high level exchange.

The Finance ministry said “this will allow both parties to review the economic situation and discuss about current priorities and future prospects”.

One of the crucial decisions taken during the meeting was the necessity of holding monthly working sessions between the ministry of Finance and the Central Bank to improve the coordination at this level.

Earlier this month, Mauritius’s monetary policy committee held the main interest rate, the repo rate, steady at 4.65 percent. However, its members were divided on the decision.

Bheenick in particular, championed hiking the key repo rate, stating that a higher rate would protect Mauritius from turbulence that has hit other emerging markets such as Turkey, besides enhancing the low level of savings. He went on to blame the excess liquidity on the government’s foreign borrowing.

But the Finance ministry in turn blamed the excess liquidity on the central bank, stating that its constant emphasis on a tighter monetary policy stance and frequent purchases of foreign currencies to build up its hard currency reserves were responsible for too much money being pumped into the banking system.

Other emerging market economies have also faced similar cross-roads on protecting investments while keeping up economic growth.

Meanwhile, members of the Monetary Policy Committee (MPC) indicated that the global excess of liquid assets in the banking system had considerably increased since the meeting of September, 2013 of the MPC, in spite of an increase of the cash reserve Ratio from 7 to 8 % in October, 2013.

Furthermore, the excess of liquid assets had reached Rs 12.9 billions in December, 2013, mainly because of the increased expenses of the government at the end of the year and the falling dues obligations.

The main factors behind this increase are: 1. the decision of the government to turn to more external financing; 2. the decision to accumulate reserves also required an expensive sterilization and; 3. the special funds and deposits of the government transferred by the Treasury within commercial banks.

The MPC observed that it needed to eliminate the excess of liquid assets to align the interest rates of the money market with the intervention rate and improve the efficiency of the transmission mechanism of the monetary policy as it underlined in the MPC report.

Image: Rundheersing Bheenick and Xavier Duval. One of the crucial decisions taken during the meeting was the necessity of holding monthly working sessions between the Central Bank and ministry of Finance to improve the coordination at this level.

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