Borrowers Face Hardship as Key Interest Rate Rise to 4.5%

The Monetary Policy Committee (MPC) has dealt a significant blow to borrowers with its recent decision to raise the key interest rate by 50 basis points, pushing it to 4.5%. This move sets the stage for many borrowers to face increased repayments on their bank loans, particularly those with variable interest rates, which will be adjusted accordingly.

Currently, the Prime Lending Rate (PLR) stands between 6% and 7%.

With the recent hike, borrowers on a loan of Rs 1 million can expect their monthly payments to jump by an additional Rs 300 over a 25-year period.

For those with loans of Rs 3 million, the increase will be even steeper, costing an extra Rs 1,000 a month.

As the dust settles, one can anticipate that various associations and active forces within the nation will soon voice their concerns regarding the magnitude of this rate increase.

Many households with long-term loans are likely to find their financial stability under threat, pushing them closer to the edges of indebtedness.

Businesses, too, will not escape unscathed, as the cost of servicing their debts to banks and financial institutions is expected to rise sharply.

The current debt burden in sectors like manufacturing, construction, and hospitality already exceeds Rs 100 billion, as per statistics from the Bank of Mauritius (BoM).

Kevin Ramkaloan, Chief Executive Officer of Business Mauritius, the foremost representative body for the private sector, found the alignment of BoM’s interest rates with those of the Bank of England reasonable.

Nonetheless, he stressed the urgent need for broader discussions about the cost and ease of doing business in Mauritius.

This came against the backdrop of a staggering 40% hike in labour costs last year due to wage increases and various adjustments.

An anonymous financial analyst expressed bewilderment at the MPC’s decision.

“Given the state of the economy, one would have hoped for a focus on fostering growth and rebuilding the economy.

Instead, we are now looking at rising public debt costs.

Ultimately, it is the businesses and households with long-term loans that will bear the brunt of these higher rates, even amidst manageable inflation.”

However, the rate hike does not resonate negatively with all financial specialists.

A currency dealer noted, “Rama Sithanen had limited room for manoeuvre regarding the MPC’s decision.

There needed to be a delicate balance between strengthening the rupee, managing inflation, and addressing the real economy.

In light of current economic imperatives, he made a decision that was imperative.”

According to this currency dealer, the MPC’s decision aims at several objectives: firstly, to encourage savings by offering an interest rate that exceeds 3%—up from 2.9%—bringing it more in line with current inflation rates.

Secondly, it is seeking to narrow the gap between the interest rate on the rupee and that of dollar deposits, currently at 4.5%.

Lastly, the intention is to cultivate an environment of confidence in strengthening the rupee against the US dollar.

Indeed, the rupee gained 26 cents against the dollar yesterday, trading at Rs 47.16 compared to Rs 47.42 on Tuesday.

Is this due to the MPC’s decision? Some observers suggest that beyond the figures, the most significant takeaway is the strong signal sent to the business community that the BoM “means business.”

“We must ensure that after this increase in the key rate, the transmission mechanism functions effectively so that results are visible.

In three months’ time, we will assess whether a further slight increase is warranted, based on the bank’s objectives,” stressed the currency dealer.

Meanwhile, the availability of foreign currencies, especially the US dollar, on the forex market remains a pertinent concern.

Rama Sithanen highlighted that since the last MPC meeting in September, the BoM has intervened in the forex market to the tune of USD 120 million, alongside measures to counteract the rupee’s accelerated depreciation since mid-November.

“It is not feasible to eradicate a long-held market sentiment that the rupee is destined to depreciate overnight.

Our local currency must regain the confidence of operators holding millions in foreign currencies before they will engage positively.

The increase in the key interest rate will surely give them pause for thought.”

In the coming days, the BoM plans to meet with bank directors and CEOs of major conglomerates to convey a unified message regarding the future financial landscape.

Source: l’Express