At its meeting of February 3rd 2014, the Monetary Policy Committee (MPC) of the Bank of Mauritius (BOM) voted 5 to 3 in favour of maintaining the Bank’s Key Repo Rate at 4.65%.
There is nothing unusual in a system of voting that members of the MPC vote one way or the other. What calls attention in this particular case however is that, at past several MPC meetings, an identical voting pattern has been recorded. Minutes of the MPC’s previous meetings show that those who have been successively outvoted were the Governor of the BOM and the two Deputy Governors.
If the same pattern repeated itself at the last MPC meeting, it would confirm that opinions are systematically divided as to which direction the Key Repo Rate should take. There are those – the majority – who believe that any signal given that the country’s key guiding interest rate should go up will be the wrong signal.
And there are the Bank’s administrators, on the other side, who believe, on the contrary, that only a perk-up of the interest rate, howsoever small, can help send the right signal to vested interests and also help tame down inflation and inflationary expectations for the good of the economy. The latter might even be thinking that several past decisions whereby the Key repo rate was successively and wilfully brought down, by an intentionally constructed majority in the MPC, from a much higher level before to its present level of 4.65%, was a red herring, prompted by the private interests of financial and other business lobbies.
Beliefs depend on the stock of information individuals rely upon to come to their conclusion about the direction and quantum of the Key Repo Rate. An overhang of global economic uncertainty also colours decision-making. The fact however that the Ministry of Finance has openly engaged in battle against the top executives of the Bank of Mauritius on this issue might lend credence to the view that the business lobby has been in action to prompt decisions its way. The business lobby has ventilated the view ahead of each scheduled MPC meeting that it needs ‘monetary easing’, i.e., an even lower regime of interest rates in order to grow the economy and create employment, a classic argument employed by business owners in capitalist economies to pull up the entire bed sheet to themselves alone.
What we see in actual fact is that whatever economic growth is being recorded is not being achieved by way of internal dynamics in the economy. Whereas locally anchored sectors such as Construction have actually contracted in past years, improving (but also unpredictable) external market conditions have actually lifted up the economy’s overall growth rate, albeit marginally. Despite sectors like ICT and finance contributing to sustain high levels of youth employment, it is not these sectors that have been asking for interest rate reduction to keep up employment levels in the economy. In fact, the country’s unemployment rate crossed the 8% mark in 2013 after hovering below this level in past years.
There has come up a persistent perception, as a result of the prevailing situation, that the majority of the MPC members may not be adopting a balanced view of where the Key Repo Rate should proceed to. We have however to give them the benefit of the doubt and credit them with personal convictions on the views they hold about the interest rate. They may be relying on objective data and parameters to take the stand they have been taking.
What are these data and parameters?
Excess liquidity is one. In December 2013, local banks were holding excess liquidity amounting to roughly Rs10 billion, that is, money in their hands which they cannot invest in lending either to the private sector or to the government. This could be interpreted to mean that since money is too costly, i.e., interest rate is high, the banks are unable to employ surplus money in their hands. Such an assumption could warrant pressing down the level of the Key Repo Rate or, at best, not to let it go up as it might have been the wish of the Bank’s top executives.
Another consideration could have been the risk of credit growth slackening up in the economy due to the interest rate factor. Such a situation could have prompted the majority MPC members to keep a tab on the interest rate factor. Was that the case actually? Not so. Total rupee deposits with commercial banks increased by Rs17.9 billion in 2013 to reach the level of Rs 266.7 billion in December 2013. Increase in bank deposits is usually employed by banks to support the growth of their lending to the private sector. During 2013, banks’ lending to the private sector increased by Rs 19.1 billion to stand at Rs 258.9 billion by end-December 2013. Thus, the banks had sufficient growth in deposits to back up their additional lending, if account is taken of their usual excess liquidity in the region of Rs 3 billion. The December 2013 level of Rs 10 billion was a temporary outlier.
Now, whereas commercial banks were raising deposits from the public in November 2013 at the weighted average interest rate of 3.25%, their weighted average lending rate to all sectors of the economy was 8.09% in November 2013. These averages indicate that banks were making a cut, on average, of nearly 5% between their deposit and lending rates. One question could be whether such a handsome spread in favour of the commercial banks would encourage more borrowing? Matters could look worse in this regard, however, from the single borrower’s standpoint if it is borne in mind that in real fact, certain banks are actually lending to specific borrowers at interest rates as high as 14% in the sugar industry, 19% in manufacturing, 17% in the hotels sector, 19% in the housing/construction sector and above 19% to some in the trade sector.
Such high rates practised by certain banks are the real impediments to economic pickup in the country. The concerned banks do not own up to their responsibilities in the situation. While heated discussions are going on about the paltry 4.65% of the Key Repo Rate, such discussions are in fact keeping out of view the much more prohibitive interest rates practised in reality by some commercial banks against selected borrowers, tending to pull down the demand for bank borrowing.
Not surprisingly, there are periodic build-ups of excess liquidity with banks in the circumstances. It appears that it is the Bank of Mauritius which has been designated as the beast of burden to take up the cost of the system’s inefficiencies. In past years, the Bank has had to issue increasing amounts of its own, not the government’s, debt instruments to mop up the excess liquidity generated on the market to support the avowed public policy of not letting the rupee appreciate in value. This comes at a cost. The Bank’s track record of profitability came to a stop last year with a net loss of Rs 1.8 billion in 2013 compared with a net profit of Rs 3.3 billion in 2012. This is a structural problem. On-going tussles at the MPC are symptomatic of the continuing shift of the burden of adjustment on to the Bank. We could have risen to the occasion and tackled the emerging problem head-on instead of perpetuating the tension on the sides at the level of the MPC.
* Published in print edition on 7 February 2014
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