The Monetary Policy Committee (MPC) of Mauritius will meet on November 11 to decide on the key rate, currently set at 4.75%. The committee faces a challenging economic environment, with persistent inflation, a weak rupee, and slowing growth. Economists expect the MPC to maintain the current key rate, citing a broken monetary transmission mechanism. This mechanism is crucial in influencing lending rates and, subsequently, economic activity.
Economists have varying opinions on the MPC's decision. Sameer Sharma, an economist, believes that the key rate has become a "moot point" due to the broken monetary transmission mechanism. He argues that increasing the rate without addressing the underlying issues will not affect real conditions. Advaita Mahadowa, an economist and Economic & Market Intelligence Manager at Strategic Insight Group, suggests that the MPC should maintain the key rate at 4.75% but remain prepared to tighten if necessary.
Inflation in Mauritius has been a concern, reaching 5.7% in September, above the target range of 2-5%. However, economists note that this inflation is largely imported, driven by factors such as energy, freight, and food prices linked to the Middle East conflict. A rate hike could weigh on growth, which is expected to slow to 2.8% in 2026, and on investment, which is expected to decline by 1.1%.
Ganessen Chinnapen, an economist, recommends maintaining the current key rate, citing fluctuations in global oil prices and the US dollar's value. He argues that a rate hike may not be the best response to inflationary pressures, as it would increase financing costs for businesses and borrowers. Instead, the Bank of Mauritius could use open market operations to absorb excess liquidity.
The priority for the Bank of Mauritius is also a topic of debate among economists. Advaita Mahadowa believes that controlling inflation should be the primary objective, as it has consistently equaled or exceeded growth since 2020. In contrast, Ganessen Chinnapen thinks that supporting economic activity and credit should be the priority, given the structural issues in Mauritius' economy.
Sameer Sharma suggests that the Bank of Mauritius should focus on executing an audit and liquidating the Mauritius Investment Corporation, which has Rs 81 billion in assets. He also recommends absorbing excess liquidity through BOM Bills with attractive carry rates and aligning the official exchange rate with market reality.
The recent decision by the US Federal Reserve to maintain its interest rates unchanged may have some influence on the MPC's decision, but economists differ on the extent of this impact. Ganessen Chinnapen believes that the Fed's decision will not directly influence the MPC's choice, given the different economic conditions and fundamentals in the two countries.
Key points
- The MPC is expected to maintain the key rate at 4.75% amid a challenging economic environment.
- Economists recommend that the Bank of Mauritius focus on supporting economic activity and credit, given the structural issues in Mauritius' economy.
- The priority for the Bank of Mauritius is a topic of debate among economists, with some advocating for controlling inflation and others supporting economic growth.
