The decision by Mauritius’ Monetary Policy Committee to maintain the key rate at 4.5% has raised questions about its effects on the economy. With comparisons to the U.S. Federal Reserve, speculation on potential shifts in monetary policy arises.
Senior economists Eric Ng has analysed the implications of this decision:
The Monetary Policy Committee which met last week decided to maintain the key rate at 4.5%. How do you welcome this decision?
This was not unexpected. Maintaining the status quo was anticipated, given that inflation is still very high, far from the target set.
The Bank of Mauritius is one of the few central banks in the world that did not raise its key rate in 2023. Other major central banks have tightened their monetary policies.
If the Bank of Mauritius had followed suit, inflation would have been lower today. This would have allowed for a slight decrease in interest rates in the face of slower growth this year.
Usually, Statistics Mauritius is very cautious in forecasting economic growth at the beginning of the year. The statistics office projects growth of 4.9% this year, down from 7.0% last year.
It is likely that they will revise this figure downward in future updates. It would not be surprising if the growth rate for 2024 ends up being below 4.0%.
The Monetary Policy Committee cannot increase the key rate (which would penalize an already declining growth) or decrease it (which would stimulate already high inflation).
The status quo is not an ideal solution, but likely the least bad. It will not stop the depreciation of the rupee or the rise in prices.
The central bank’s position is very uncomfortable. After sowing money, it is now reaping an inflationary storm.
What are the implications of this status quo on consumption, inflation, investments, savings, and the economy in general?
The MPC’s decision has no impact on the major economic indicators. In fact, in the March 29 release of the national accounts, before the MPC meeting, Statistics Mauritius did not take into account the impact of interest rate changes on these indicators.
It is as if they anticipated the key rate would be maintained. What do the numbers tell us for 2024?
Household consumption will continue to grow moderately, below 3.0% per year, but much slower than national production, as it will decline relative to GDP.
Private investment as a percentage of GDP will certainly increase, but mainly in construction and transport equipment, not in machines that enhance business productivity.
Investment in the manufacturing sector remains low, while investment in the information and communication sector, an emerging sector, stagnates.
As for savings, they are increasing because people anticipate higher taxes in the future, aware of the current high public debt.
Year-on-year inflation, after dropping to 3.9% in December, abruptly rose to 5.2% in January and 6.2% in February.
Even excluding food and energy prices, core inflation remains very high at over 4.0%.
However, food inflation in particular, which affects lower-income households the most, is over 15% on an annual basis.
The Federal Reserve in the U.S. also maintained its key rates last week, for the fifth consecutive time.
It indicated that it plans to reduce rates by three-quarters of a percentage point this year. Can we expect the same trend in Mauritius, i.e., a reduction in the key rate this year?
The Fed can maintain its rates because it has raised them significantly. In 2023 alone, it did so four times for a total of 100 basis points, while the Bank of Mauritius did nothing.
Since March 2022, the Fed has raised its key rate by 525 points, while our key rate has only increased by 265 points.
Given this growing gap between American and Mauritian rates, our key rate should actually rise even as the Fed’s rate begins to fall.
If we did not follow the Fed when it tightened interest rates, we do not have to follow it when it loosens them.
It would not only be intellectually dishonest, but also economically illogical and ineffective.
However, logic no longer seems to play a role in our monetary policy since COVID-19, resulting in a drastic depreciation of the rupee.
Source: Defi Media
