MPC notes Greek debt crisis as major growth risk; expects GDP growth of 4.6% in 2016
Minutes of the MPC meeting indicate that the key repo rate of 4.65% was maintained and GDP growth of 3.7% and 4.6% was forecast for the Mauritian economy for 2015 and 2016 respectively; with the possibility of the budding Eurozone recovery being affected by the Greek debt crisis constituting a major risk to the domestic growth outlook.
Mauritius can expect GDP growth of 3.7% for 2015 and 4.6% for 2016, noted its central bank governor Ramesh Basant Roi, but cautioned that threats to Eurozone recovery by the prevailing Greek debt crisis constitute a major risk to the domestic growth outlook.
The Bank of Mauritius (BoM) released on 30 July 2015 the minutes for the 37th Monetary Policy Committee (MPC) meeting held on 16 July 2015, which was chaired by its central bank governor, where members discussed reports of economic and financial development.
The MPC noted that improvement in domestic economic growth would result from the accommodative monetary policy and projected pick-up in economic activity in main trading-partner countries.
Discussions on the international economic environment hovered around global growth projections laid down in July 2015 with update on the IMF’s World Economic Outlook, which resulted from a downgrade in the growth performance of advanced as well as emerging and developing economies.
It was noted that, while global growth projection for 2016 is being maintained at 3.8%, but global growth is expected remain moderate and disparate across regions. Risks to global growth remain tilted on the downside.
Currency markets were volatile with the US dollar broadly supported by the recovery in the US economy and expectations of a rate hike by year-end. The euro, which initially recovered vis-à-vis major currencies on the back of better economic conditions as a result of the ECB’s QE programme, lost some ground in the wake of the Greek crisis.
On the domestic front, the MPC highlighted that the economy continued to operate below its potential, reflecting under utilisation of resources. An overall assessment of the state of the real economy in quarter 1 indicates that a negative output gap prevailed as a result of adverse shocks from domestic and external demand, which outweighed accommodative monetary conditions. Unless structural reforms unleash productivity gains, lower saving and investment rates could pose a risk to growth going forward.
Moreover it is to be noted that since the last MPC meeting, several banks lowered their savings deposit and prime lending rates, despite an unchanged key repo rate (KRR). Such adjustments have been effected on several occasions in recent years and indicate the weak interest rate transmission mechanism from the policy rate to money market rates.
As for the Mauritian Rupee, it strengthened somewhat against the US dollar after the April 2015 MPC meeting as the greenback weakened on international markets. The exchange rate of the rupee reflected movements of key currencies on international markets as well as domestic factors, like the decision of the State Trading Corporation to purchase part of its USD requirements from domestic banks.
Forecast from BoM staff shows that inflation would sustain its current momentum in the short term but pick up thereafter. Headline inflation is being estimated at 1.5% in 2015 and around 3.0% per cent in 2016, conditional on assumptions holding true.
Measures announced in the Budget 2015/16 are also expected to have a positive impact on investment and business confidence, if properly implemented. The possibility for the budding Eurozone recovery to be affected by the Greek debt crisis constitutes one of the main risks to the domestic growth outlook. Domestic growth also appears to depend significantly on the successful implementation of public investment plans.
Basant Roi noted, “The excess liquidity in the banking system was driving the yields on Government papers down and thus, the interest rate structure was distorted.”
Consequently, he announced that the Bank would come up with a new monetary policy framework and undertake to mop up the excess liquidity in the banking system in a phased manner. It is expected that money market interest rates would move in line with the KRR.
Given the uncertain global economic environment and the recent budgetary measures announced to kick-start investment amid subdued inflation, members deemed it more appropriate to maintain the current monetary policy stance and voted towards keeping the key repo rate unchanged at 4.65%.