Mauritius: ‘Imported inflation down, but power price hikes a concern’ – apex banker Seegolam

He also elaborates on how technology “plays a major role in the bank’s transformational process”. 

Could you tell us more about the Bank of Mauritius’ new monetary policy which went into effect in January 2023?

When I took the helm of the Bank of Mauritius in 2020, one of my priorities was to address the shortcomings of the monetary policy framework as achieving price stability is the primary objective of the central bank.

The obsolescence of the framework, introduced in 2006, became even more evident during the Covid pandemic in light of the decisions taken by the Monetary Policy Committee and the measures we had to implement to shield the economy.

It was imperative to craft a new monetary policy framework that would seamlessly meet the requirements of a modern and sophisticated economic and financial environment. We are one among a handful of countries to have elaborated such an innovative framework during the current challenging and shock-prone era.

The new monetary policy framework was launched on 16 January 2023 and addresses the deficiencies of the previous one. It helps further strengthen the monetary policy transmission mechanism.

It will continue to rely on the interest rate channel to steer economic variables and expectations while focusing on a number of key operational and strategic elements.

The bank has adopted an explicit inflation target of 3% to 5% with a medium-term objective of 3.5%. The target provides a benchmark against which the public can gauge inflationary pressures and assess the bank’s success in keeping inflation under control.

The key features of the framework promote greater transparency in the monetary policy decision-making process. The forward-looking approach to managing inflation requires stronger communication about the stance of monetary policy and monetary operations undertaken by the bank.

Under the new framework, the “Key Rate” has replaced the Key Repo Rate as the policy rate used to signal the stance of monetary policy. It was introduced at the same level as the Key Repo Rate. The overnight interbank rate has replaced the yield on the 91-Day Bill as the operational target for monetary policy.

The main instrument of monetary policy is the 7-Day BoM Bill, which the bank issues every Friday at a fixed rate equal to the “Key Rate” and on a full allotment basis. The bank will maintain a symmetric interest rate corridor of 200 basis points around the “Key Rate” through standing deposit and lending facilities. Banks with excess or shortage of liquidity may use the standing facilities to manage their liquidity positions.

An Overnight Lending Facility is available to banks at their discretion at the “Key Rate” plus 100 basis points, and an Overnight Deposit Facility is offered to banks at their discretion at the “Key Rate” minus 100 basis points.

The bank is actively managing excess liquidity from the system under the new framework, mainly through the Overnight Deposit Facility and the issue of the 7-Day BoM Bill. Banks are remunerated at a higher rate than has been the case under the previous framework.

The introduction of the new operational framework has already led to an adjustment to short-term interest rates – such as in the overnight interbank rates and yields on treasury bills. It is expected that banks will pass on the adjustments in short-term rates, including higher remuneration on excess liquidity parked at the bank, to customers through a higher Savings Deposit Rate, which will benefit savers. In parallel, the Prime Lending Rate is also expected to be adjusted accordingly.

Going forward, the objective is to improve the effectiveness of the monetary policy, anchor inflation expectations and enable the bank to gain more traction on inflation. Leaving inflation unaddressed can lead to highly volatile and destabilising price pressures which may have severe long-term impacts on the purchasing power of individuals, the labour market, and ultimately, economic growth.

The costs of not undertaking bold reforms now, through the introduction of the new monetary policy framework, may be more painful for the population in the long term. The central bank, however, strives to act in the best interest of the population and the economy.

Rising global inflation has called into question the role of central banks, with many experts pointing to their failure to foresee the precise nature of price pressures last year. Could you comment on that?  

Inflation during 2022 was largely synchronised across the world and was tied to supply-side disturbances associated with the pandemic, the commodity and energy price gyrations emanating from the Russia-Ukraine war, and soaring freight costs.

These cost-push factors were largely unpredictable and affected different countries differently, depending upon their relative degree of openness, marginal propensity to import, their source market, and their exchange rate pass-through. For highly open economies like Mauritius, in addition to external price pressures and the exchange rate effect, domestic inflation is also affected by disturbances to prices of locally-produced food items, namely vegetables, which account for a relatively large share of the CPI basket.

Vegetable prices were subject to wide fluctuations, some of which were seasonally induced while some were largely driven by rising prices of fertilisers. As such, headline inflation more than doubled from 4.6% in January 2022 to 10.8% in December 2022.

In the presence of extreme weather conditions tied to climate change-related disturbances, we should expect a relatively larger share of supply-side impulses on inflation, and consequently, greater uncertainty to predict it and limited time to manoeuvre.

How do you see recent inflation developments and what will the direction of monetary policy be in the future?

Inflation in Mauritius has been pronounced throughout 2022 due to a mix of international and domestic factors. These include the geopolitically-induced soaring global food and energy prices during the first half of 2022, persistent supply-chain disruptions, and higher freight costs. Domestic factors, including weather-related disturbances, also influenced prices of local food items.

2022 witnessed a normalisation process in monetary policy with a series of five successive hikes aggregating 265 basis points, bringing the policy rate to 4.5%.

In 2023, the MPC will closely monitor the situation, especially inflation and growth developments so far as well as forecasts of inflation and growth. MPC members will meet up on a quarterly basis and deliberate on the “Key Rate” accordingly.

What is your forecast for Mauritius’ inflation in 2023?

Inflation is forecast to moderate progressively during 2023 as influences from past price shocks gradually dissipate over the coming quarters.

Domestic price pressures are anticipated to ease away as the effects of commodity price declines during the second half of 2022 begin to seep in. Global supply and logistics disturbances are expected to be resolved as market mismatches decrease, enabling an efficient stabilisation in commodity prices.

The normalisation process in monetary policy is also ensuring proper anchoring of inflationary expectations in the medium term.

The slowdown in global economic activity and the decisions by major trading partner countries to raise their interest rates will help in keeping a lid on foreign inflation, with lower pass-through effects on domestic prices.

Consequently, inflation in Mauritius is expected to take a downward trajectory from early 2023. However, this excludes supply-side shocks like electricity price hikes which will be effective as of February 2023. Headline inflation is forecast within the range of 5-6% for the year.

You were recognised by The Africa Report as one of the Top 40 Digital Leaders of Africa. What are the areas in which you are focusing while leading the Bank of Mauritius with regard to technology and digitisation?

I have always been an ardent proponent of harnessing the potential of technology to bolster socioeconomic development. I am indeed giving particular attention to digitalisation, especially since the onset of the pandemic which has accelerated the use of digital means of payment both locally and internationally.

In that regard, the bank has already embarked on a number of projects to further modernise its payment systems and introduce innovative payment solutions. The aim is to provide citizens with user-friendly payment solutions. The introduction of the MauCAS QR code in September 2021 has been a game-changer and has simplified the lives of consumers.

Modernising the banking landscape also means creating an enabling environment for new types of players, namely digital banks. It is with that objective in mind that dedicated guidelines on private banking and digital banks were introduced in 2021. The guidelines will provide a conducive environment for private banking and digital banks to flourish.

The Bank of Mauritius is also working on the launch, on a pilot basis, of a CBDC, the Digital Rupee. We are actively building cross-border bridges with other central banks to give our CBDC a wider reach.

Technology plays a major role in the bank’s transformational process but, as a central bank, we remain very vigilant regarding risks. To that effect, we invest heavily not only in research and development but also in IT and cybersecurity. I am pleased to share that our efforts have not gone unnoticed. The IMF has taken the Bank of Mauritius as a model on the front of cybersecurity.