Monetary policy needs to be ahead, and not behind the curve, according to statements issued by the Bank of Mauritius. These statements follow the Monetary Policy Committee meeting of 28 April 2014, when the majority voted to keep the key repo rate unchanged at 4.65%.
The presentation by the central bank argues a case for increasing interest rates. Stating that monetary policy needs to be proactive, it notes that it is high time to start the process ofnormalising the interest rates, as has been reinforced by global financial institution IMF.
The presentation indicates that a rise in the repo rate is essential to avoid jeopardizing growth in Mauritius, projected to strengthen close to its potential level in 2014.
The documentquoted in its supportinsights from the 2014 IMF Spring Meeting, where an important takeaway was that central banks must anchor inflationary expectations and protect price stability as sustained periods of Negative Real Interest Rates can lead to dangerous risk-taking.
Then, the presentation went on to note that Mauritius is facing a situation of Negative Real Interest Rates as the key repo rate has fallen behind the neutral rate since 2013 Q4.
This premise was firmly established under various scenarios as per the Bank’s estimates of the neutral rate of interest using the globally-accepted Taylor Rule, and the document went on to note that the gap is widening over the period.
Further, giving the prime rationale for Governor Rundheersing Bheenick’s stance in pressing for a rise in repo rates, the presentation cautions that both savings rate and inflation rate are reeling under the impact of the low repo rate.
A low interest rate discourages people from saving, since it implies a low return on investment. At the same time, it spurs spending, which implies too much money chasing too few goods, causing prices to rise and pushing up inflation rates.
Accordingly, on the one hand, the savings rate continues to lag the investment rate; while on the other, the inflation rate is stubbornly high, indicating consistent price rise in the island economy.
Thus, with regard to the Savings Investment Gap, the savings rate of last year amounted to 12.8% of GDP, which lagged far behind the investment rate at 21.2% of the GDP. This puts the development of the island nation at risk as it seeks to boost its infrastructure, as savings are falling far short of its development funding requirements.
Additionally, while inflation is muted, it is almost 10 times above the inflation prevailing in the Eurozone, the island economy’s main trading partner. Also, Mauritius has taken commitment under SADC and AACB Macroeconomic Convergence Criteria for an inflation target of 3% and the inflation rate is currently in excess of 4%.
Concerning building adequate foreign exchange reserves, the Operation Reserve Reconstitution was introduced since June 2012, with a target for import cover of 6.0 months, and at present Mauritius stands at a mere 5.8 months.
Moreover, excess liquidity has been consistently above the acceptable threshold of Rs 3 billion, and has been on the upturn since 2012 on account of net redemption of Treasury Bills; increasing recourse of Government to foreign borrowing; and intervention of BoM to fight currency appreciation causing rupee excess liquidity.
The report also cautions against rising bad debts, especially in construction, and notes that corporate indebtedness poses continued risks to financial stability.
The persistence of excess liquidity in the banking system and its potential impact on the Bank’s Balance Sheet remains a source of vital concern to the Bank and spoils the transmission mechanism of monetary policy, concludes the presentation.
Image (Coup Four and a Half): The presentation cautions that the savings rate at 12.8% of GDP in 2013 lagged far behind the investment rate at 21.2% of the GDP, putting the development of the island nation at risk as it seeks to boost its infrastructure.
More business news on AfricaMoney
Facebook Comments