Slow Growth in Mauritius to Encourage Easing In 2017


Thursday, July 06, 2017 5:48 PM/BMI Research

BMI View: The Bank of Mauritius will cut its policy rate by 50bps in 2017 in the face of subdued economic growth and low inflation. In 2018, the policy rate will remain on hold as inflation will increase and growth will improve.

The Bank of Mauritius (BoM) will cut the benchmark interest rate in 2017 to help stimulate the sluggish economy. Growth will slow in 2017 due to the impact of weak consumption in Europe and amendments to Mauritius' tax treaty with India, weighing on key sectors of the economy.

While rising oil prices will offer tailwinds to inflation, we note that commodity price increases in H217 will be relatively modest, giving the bank some space to continue monetary easing.

Indeed, after 65 basis points (bps) worth of cuts over the past two years, we expect that policymakers will continue monetary easing in 2017, cutting the policy rate by 50bps to 3.50%.

Thereafter, gradually rising price pressure will see policymakers shift away from easing, keeping the policy rate on hold through 2018.

Easing Cycle Will Continue In 2017
Inflation in Mauritius is poised to remain low, allowing the BoM room to enact monetary easing. We expect inflation to average 2.4% in 2017 – an increase from the 1.0% recorded in 2016 but nevertheless low.  

Rising commodity prices will continue to offer some tailwinds to inflation, putting upward pressure on transport (15.0% of CPI basket) and food prices (27.0% of CPI basket).  

We note, though, that with year-on-year commodity price increases poised to be notably slower in H217 than H117, upward pressure will be relatively moderate (see 'From Relation To Disappointment', April 21).

Moreover, a stronger currency will further temper inflationary pressures. This means that, while rising, inflation will remain relatively constrained, enabling the bank to focus to a greater extent on supporting economic growth.

Meanwhile, we anticipate that real GDP growth will be relatively sluggish, only reaching 3.1% in 2017 after averaging 3.5% over the last five years.

Subdued economic growth will stem from weaker consumer demand in Europe and changes to a tax treaty with India, which will weigh on the key textile, manufacturing and financial sectors (see 'Sluggish Demand In Europe To Weigh On Growth', May 3). Loan growth was negative between November 2016 and February 2017 (most recent available data) and we expect this to continue as faltering economic growth tempers demand for consumer and commercial lending.  

This will encourage the BoM to enact a cut in the latter half of 2017 to stimulate the economy, by which time the relative weakness of growth will have become more apparent.

On Hold In 2018

Thereafter, we expect that the BoM will shift from an easing cycle to more neutral monetary policy, and anticipate no further cuts in 2018.

Economic growth will rise modestly, tempering some of the impetus for further rate cuts.

More crucially, inflation will begin to accelerate to an average of 3.5%, meaning the bank will have far less room to engage in monetary easing while maintaining price stability.

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