Governor Rundheersing Bheenick said on Tuesday that the key repo rate should be raised to prevent outflow of capital, taking a stance contrary to the monetary policy committee (MPC) which decided to hold the rate steady at its Monday meeting.
The central bank head said that raising the rate would protect the Indian Ocean Island from the turbulence that has hit other emerging markets and would address the issue of low savings in a nation that is a hub for offshore financial services.
“We should not sit back and do nothing. The central bank has to get its act in order for it to fight inflation which is at risk of soaring very rapidly, while our economic growth rate will be around 4 percent,” he told a news conference.
“We should be very watchful and redouble efforts to fight inflation, notably core measures of inflation. The longer we wait, the more we risk facing the same scenario as other emerging economies like Turkey,” he added.
He also observed that there was “a structural divergence inside the MPC”. A central bank statement had said members of the committee were divided on “the need to rapidly normalise the key repo rate to address the risks to inflation and the excess liquidity situation while enhancing savings in the economy”.
“We don’t see how a loose monetary policy will help to reach a growth rate of 5 percent,” the governor said. “The solution is elsewhere. What we need is structural reforms. Without these reforms our natural growth rate will be around 4 percent.”
The MPC members noted that domestic economy has continued to hold up well to external headwinds and output is estimated to be near its potential, where GDP growth is forecast at 3.7-4.0 per cent for 2014. This represents an increase of 0.5-0.8 percentage points above the growth of 3.2% in 2013 estimated by Statistics Mauritius.
However, core measures of inflation have increased, reflecting underlying inflationary pressures in the economy, where the prices of locally produced goods and services had a higher impact on domestic inflation than prices of imported goods and services.
“If we maintain interest rates at its present level, savings will continue to go down. This will increase our dependency on foreign financing which will expose our economy to external shocks,” the governor said.
Futhermore, conditions in the banking system, notably from persistently high and growing excess liquidity, had also deteriorated.
“If we maintain interest rates at its present level, savings will continue to go down. This will increase our dependency on foreign financing which will expose our economy to external shocks,” the governor said.
He went on to describe excess liquidity as an “urgent problem”.
The detailed minutes of the MPC meeting held on Monday where it decided to keep the repo rate unchanged at 4.65 percent will be released on February 17.
Image (via Africa Money): Bank of Mauritius head Rundheersing Bheenick said on Tuesday that the central bank must redouble efforts to fight inflation.
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