Wednesday, February 17, 2016

Mauritius holds rate on low inflation but excess liquidity

    The central bank of Mauritius left its benchmark repo rate unchanged at 4.40 percent, saying it expects inflation to remain "quite low" but added that its monetary policy committee had taken note of "the evolution of excess liquidity in the banking system."
    The Bank of Mauritius, which cut its rate by 25 basis points in November last year in the first change in rates since June 2013, also said members of its MPC had discussed maintaining the rate or reducing it but a majority had decided to keep the rate steady.
    In November the MPC was unanimous in its decision to cut the rate to provide further stimulus to domestic growth as inflation didn't pose any serious risks and was expected to remain low.
    Since the meeting in November, the central bank said inflation had continued to decline due to low commodity prices and persistent economic slack and forecast inflation of around 2.3 percent in 2016.
    In November the bank's staff had forecast inflation of around 3.0 percent for 2016 and 3.3 percent by the end of the year.
    Headline inflation in Mauritius - and island nation in the Indian Ocean off the coast of Africa - eased to 0.4 percent in January from 1.3 percent in December, continuing its decline from 1.7 percent in June 2015.
    CORE2 inflation, which excludes energy prices, mortgages and administered prices from the consumer basket in addition to food, beverages and tobacco, rose by 3.5 percent in January from 2.3 percent in December and 0.8 percent in January 2015.
     The economy of Mauritius expanded by an estimated 3.4 percent in 2015 but is still operating below its potential level, mainly due to sluggish investment, the bank said.
     The bank's staff is forecasting Gross Domestic Product growth of 3.8 percent in 2016, below its November forecast of 4.2 percent.

   The Bank of Mauritius issued the following statement:

"The Monetary Policy Committee (MPC) of the Bank of Mauritius has decided by majority vote to keep the Key Repo Rate (KRR) unchanged at 4.40 per cent per annum at its meeting today.

The MPC took note of the January 2016 IMF’s World Economic Outlook Update. Global growth was revised down to 3.4 per cent for 2016, 0.2 percentage point lower than its October 2015 forecast. The MPC also reviewed recent developments in the world financial markets and acknowledged that risks to the global growth outlook remain tilted on the downside. The MPC would continue to monitor the heightened market volatility stemming from geopolitical risks, the rebalancing of growth in China and diverging monetary policies across regions.

The domestic economy grew by 3.7 per cent in 2015Q3, surpassing the 3.1 per cent growth in the previous quarter and 3.6 per cent in 2014Q3. However, the economy is still operating below its potential level, reflecting mostly sluggishness in investment. The MPC discussed at length productivity trends and wage growth in the economy, debt levels and trends in non- performing loans in the banking sector. The Bank staff is projecting a real GDP growth of 3.8 per cent for 2016, which is consistent with projections by domestic and international organisations. Bank staff projections indicated a gradual closing of the output gap in 2017.

Inflation indicators have continued to decline since the previous MPC meeting, on the back of low global commodity prices and persistent slack in the domestic economy. Headline inflation fell steadily from 1.7 per cent in June 2015 to 1.2 per cent in September 2015, and remained contained within 1.2-1.3 per cent range to date. Going forward, headline inflation is projected to rise to around 2.3 per cent in 2016. Year-on-year inflation dropped from 2.0 per cent in September 2015 to 0.4 per cent in January 2016. The MPC views that domestic inflation would remain quite low in the context of subdued global commodity prices and restrained inflation in major trading partner countries.

Importantly, the MPC took note of the evolution of excess liquidity in the banking system.

The MPC carefully weighed the risks to the growth and inflation outlook. The MPC members discussed lengthily on various scenarios and weighed different factors in support of keeping the KRR unchanged at its current level of 4.40 per cent or reducing it.

The MPC will issue the Minutes of its meeting at 13:00 hours on Wednesday 2 March 2016."


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