Unchanged Repo Rate and its Implications by S. Tengur

Paper presented at the Monetary Policy Committee
Held on 28 April 2014
Unchanged Repo Rate and its Implications
I would like at the very outset to express my concern on the lobbying going on before every meeting of the MPC to either keep the same repo rate or to reduce it. Articles in the press, give us the impression that we are before a “fait accompli” and that the MPC looks like a mere rubber stamp.
As a representative of consumers, I note that one of the arguments put forward against any rise in the repo rate is that it will affect investment, hence increase unemployment and represent risks for the exports of the manufacturing industry. These are classical arguments as it would appear that investment is INSENSITIVE TO CHANGES IN INTEREST RATE. Even at low interest rate, investment has not increased. The proof is that growth remained low at 3.2% and the forecast of 3.7% is hardly encouraging at a time when the world economy is picking up.
There is a perception that access to cheap money encourages local investors to borrow from local banks to invest abroad. This looks more like a hypothesis but there is a need for a serious study to find out evidence to prove or disprove this argument. But from what we witness in terms of figures, maintaining the repo rate at 4.65% appears to have had no effect on investment and growth or employment. On the contrary, private sector investment declined and unemployment stayed unchanged.
The point I would like to make today, has a direct bearing on fixed-income earners, who are penalised and impoverished. There are at present some 90 000 civil servants and local government workers including the parastatal bodies; some 90 000 pensioners and the thousands of workers in the private sector. The majority of this category of workers are either middle income or low income earners.
These people are penalised by the rise of inflation rate on one hand and the decrease of interest rate on their savings – both of these problems can only be minimised by a rise of the repo rate.
I would like now to delve briefly on the inflation rate to support my arguments:
Since the last MPC meeting, both the twelve-month average (headline) and the year-on-year CPI inflation rates have increased. The headline inflation rate has progressed by 0.5 percentage point during the first quarter of 2014 to reach 4.0 per cent, a level not seen since November 2012. For its part, the year-on-year CPI inflation jumped to 5.6 per cent in February 2014 on the back of rising food prices during the first two months of the year. Although it cooled off to 4.5 per cent in March – the highest level since January 2012 – it is expected to remain elevated in the coming months. These two tables give you an idea of the rise in inflation rate.
(per cent)
Headline inflation Year-on-Year CPI inflation
August 2013 3.5 3.1
September 3.5 3.3
October 3.4 3.4
November 3.5 3.9
December 3.5 4.0
January 2014 3.7 5.1
February 3.9 5.6
March 4.0 4.5
1. The Headline CORE1 and CORE2 inflation rates are on an upward trend too. CORE1, which excludes food, beverages, tobacco and mortgage interest from the CPI basket, has risen by 0.3 percentage point during the first quarter of 2014.

(per cent)
Headline CORE1 Headline CORE2 Year-on-Year CORE1 Year-on-Year CORE2
August 2013 2.8 2.7 2.6 2.3
September 2.7 2.7 2.6 2.2
October 2.6 2.6 2.6 2.3
November 2.6 2.5 3.0 2.9
December 2.6 2.6 3.3 3.2
January 2014 2.8 2.6 3.6 3.4
February 2.9 2.7 3.5 3.2
March 2.9 2.7 2.7 3.1

2. Long-term inflation expectations are rising too. Yields on 5-year Government of Mauritius Bonds have continuously increased. The weighted average yield on bids accepted at the auction of 19 February 2014 was 5.83 per cent compared to 4.08 per cent at the auction held on 24 April 2013. With regard to 10-year Government of Mauritius Bonds, the weighted average yield on bids accepted at the auction of 22 January 2014 was 7.07 per cent, higher than the 6.71 per cent at the auction held on 27 November 2013.

3. With inflation up, real interest rate on saving deposits goes deeper into negative territory. Currently, interest rates on saving range from 2.50 to 3.40 per cent. Against a year-on-year inflation rate of 4.5 per cent, real interest rate on saving varies from -1.10 to -2.00 per cent. The negative return on money encourages savers to place their funds elsewhere than in banks. On the other hand, cheap money induces individuals to borrow and spend. This builds up inflationary pressures in the economy. And it becomes more difficult to address the problem of over-indebtedness.

4. As prices rise, consumers draw in their savings to spend. This is reflected at the macroeconomic level. While annual household consumption kept growing at the same rate, the saving-to-GDP ratio continued to fall, from 14.4 per cent in 2012 to 12.8 per cent in 2013. In absolute terms, Gross National Saving was Rs 2.7 billion lesser in 2013 than in 2012.
5. National saving is lagging far behind domestic investment. The resource gap has widened to 9.4 per cent of GDP in 2013. Imports of goods are fuelling consumption rather than investment. A trade deficit would be conducive to economic growth if goods were imported for investment rather than for consumption. On the other hand, Mauritius is relying more and more on foreign saving to finance its investments. Only an increase in domestic saving can lead to a reduction in trade deficit and to investment-induced economic growth.

6. The problem of excess liquidity in the banking system has remained persistent since the last MPC meeting. Excess cash holdings increased from Rs 7.8 billion on 6 February to Rs 11.5 billion on 6 March. Excess liquidity is the consequence of the very low interest rate environment maintained over the last years, leading to easy credit. As loans create deposits which create loans which create deposits, and so on, monetary expansion is sustained up to a point where there is no more investment project for credit financing, hence the excess liquidity that remains idle.

7. While inflation is becoming a bigger problem with upside risks, economic growth remains manageable. Statistics Mauritius has maintained its forecast of 3.7 per cent of GDP growth for the year 2014, better than in 2013 (3.2 per cent). There are no downside risks to growth that are looming. But still, as I said earlier, it is not encouraging at a time when the world economy is picking up and unemployment rate remains at a standstill, stuck at 8.0 per cent in 2013 as in 2012.

8. The World Economic Outlook is brightening. The US economy is improving so much that the Fed has further reduced its monthly amount of bonds purchase. Unemployment in Britain has fallen below 7 per cent. Many central banks of emerging countries have raised their benchmark interest rate.

9. Finally, I would conclude that there is room for improvement and with a rise of the repo rate, it will have more positive effects on the social life of people and will induce them to save. At present saving is as low as 14%. No wonder that growth is moderate.

10. Chairperson, I rely on the wisdom of the MPC members to take the right decision and raise the repo rate to stimulate savings and discourage consumption for the good of the country and its people.
Thank you.
Suttyhudeo Tengur
President APEC
April 28, 2014

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