It is the first cut in rates by the Bank of Mauritius (BOM) since July 2016, when the rate was lowered by 40 basis points, as the central bank continues an easing cycle that began in December 2011 when the rate was cut from 5.50 percent.
The rate cut comes after the International Monetary Fund (IMF) on Aug. 14 recommended the central bank tighten its accommodative monetary policy to tackle inflationary pressures and also modernize the monetary policy framework to strengthen its response to shocks.
But the BMO said its monetary policy committee had taken the "view that there is a need to stimulate more investment into the productive sectors of the economy," noting that consumption had moderated, exports and goods and services had declined while investment spending had firmed.
BOM staff lowered its forecast for economic growth this year to 3.6 - 3.8 percent from its previous forecast of 3.8 - 4.0 percent.
In the first quarter of this year Mauritius' Gross Domestic Product slowed to annual growth of 3.5 percent from 4.0 percent in the previous quarter. BOM said growth slowed to 3.4 percent in the first quarter from 4.2 percent in the fourth quarter of 2016.
Last month the IMF forecast 2017 growth of 3.9 percent on the back of dynamism in the construction sector, with support from tourism and financial services, albeit at a slower pace than in 2016 when the island nation's economy grew by 3.5 percent.
For 2018 BOM staff expects growth to accelerate to 4.2 percent.
In today's statement the central bank made no reference to the implementation of a new policy framework. BOM has been working on a new framework since last year and said in February it was still working on the necessary conditions before implementing it.
Inflation in Mauritius eased to 5.3 percent in July from 6.4 percent in June but the central bank said inflation had risen "noticeably" since the last meeting of its monetary policy committee, reflecting transient factors, including higher taxes on alcoholic beverages, tobacco and gas oil.
Barring major shocks, BOM expects inflation to ease to an average of 4.0 percent this year and then about 3.8 percent in 2018, as base effects taper off.
The IMF last month noted inflation had picked up speed on supply shocks, with signs of a further building of inflationary pressures.
The IMF forecast inflation would remain above 5 percent in the second half of this year due to second round effects from higher food and fuel prices, and the rise in excise taxes.
The Bank of Mauritius issued the following statement:
"The Monetary Policy Committee (MPC) of the Bank of Mauritius has unanimously decided to cut the Key Repo Rate by 50 basis points to 3.50 per cent per annum at its meeting today.
The MPC noted that global economic activity maintained its momentum and the IMF July 2017 WEO Update projects a pick-up in global growth from 3.2 per cent in 2016 to 3.5 per cent in 2017 and further to 3.6 per cent in 2018. However, the growth outlook is subject to downside risks stemming mainly from policy uncertainty in advanced economies, financial sector vulnerabilities in some countries, and rise in protectionism. Amid easing oil prices, global inflationary pressures have subsided, especially in advanced economies where inflation remains at levels below central bank targets.
Inflation in Mauritius went up noticeably since the last MPC meeting, reflecting transient factors, including the impact of higher prices of alcoholic beverages, tobacco and Mogas and gas oil. Headline inflation rose from 1.3 per cent in March 2017 to 2.7 per cent in July 2017. Year-on-year inflation has been volatile and stood at 5.3 per cent in July 2017. Barring any major shock, headline inflation is forecast at about 4.0 per cent for calendar year 2017 and at about 3.8 per cent in 2018. The MPC took the view that inflation is unlikely to pick up significantly, as the base effects would taper off subsequently.
The domestic economy grew at 3.4 per cent year-on-year in 2017Q1 compared to 3.8 per cent in 2016Q1 and 4.2 per cent in 2016Q4. Overall, while investment spending firmed up, final consumption expenditure moderated and export of goods and services kept declining. The MPC took the view that there is a need to stimulate more investment into the productive sectors of the economy. Bank staff projects real GDP growth rate at market prices to be between 3.6-3.8 per cent for 2017 and 4.2 per cent in 2018.
The MPC took note of the Bank’s efforts to deal with the excess liquidity situation.
The MPC weighed the risks to the growth and inflation outlook and decided to give a fillip to the growth momentum. Accordingly, the MPC decided to cut the Key Repo Rate by 50 basis points to 3.50 per cent per annum.
The MPC will issue the Minutes of its meeting on Wednesday 20 September 2017."
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