In the latest flare-up in the row between the central bank and the government, the Governor of the Bank of Mauritius stressed that Mauritius must raise interest rates if it intends to achieve the year-end inflation target of four per cent.

Talking to Reuters, Bheenick expressed concern over the leap in consumer prices over the past three months and the fact that Mauritius being, import-dependent, could expect greater external pressure as inflation picks up in developed economies. “We need to contain consumption expenditure because consumption for us is mostly imports. These are things that are crying out for correction,” Bheenick said.

He estimated that if the bank’s repo rate level was raised 50 basis points from its current 4.65 per cent, the year-on-year inflation rate is expected to slow to around 4 per cent by December from 5.6 per cent in February.

“We are a very open economy, so we should be able to take measures to try to contain the knock-on effects on domestic inflation,” Bheenick said in a telephone interview with Reuters.

Together with two other central bank executives, Bheenick pushed for such an increase last month but were outvoted by the Monetary Policy Committee’s external members who were appointed by the Finance ministry.

Hence, the five external members appointed by the finance minister backed leaving rates on hold, to avoid undermining economic growth.

Currently, the rates on deposits of commercial banks stand at some 200 basis points below inflation, and to persuade them to increase their own rates on deposits and encourage Mauritians to save more, Bheenick argued in favour of a higher key rate.

According to the latter, the central bank data anticipates an inflation range as broad as 3.5 to 6.5 per cent based on different policy incomes, therefore he could not predict where inflation would end the year if policy remains the same.

The Governor said that Mauritius needs to take into account that it is “hopelessly behind the curve” and added that real rates of return are negative.

As Bheenick stated last month, the debate between the growth and inflation is a “raging controversy”. He added that the bank maintained its economic growth forecast of 3.7 to 4 per cent for 2014, compared to last year’s growth, estimated at 3.2%.

Bheenick noted that he would be satisfied with bringing the savings rate back up to 15 to 16 % in the medium term because in the past 10 years, Mauritius’s savings rate has more than halved from just below 30 per cent to around 13 per cent.

He added that the finance ministry had reduced its reliance on rupee debt. This led to a flurry of net redemption of government paper, pumping more money into the market and escalating an already problematic excess liquidity issue.

“We are busy combating currency appreciation. We have to go and sterilize the rupees we put on the market and on top of that the government is having a net redemption in domestic debt and leaving it in the market,” Bheenick said.

It is to be noted that in 2013, the central bank bought more than $1 billion worth of hard currency, resulting in total reserves of $3.5 billion, in an effort to combat the excess liquidity issue.

Image (AfricaMoney): Talking to Reuters, Bheenick expressed concern over the leap in consumer prices over the past three months and said that consumption expenditure must be controlled.

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