The new monetary policy framework aims to enhance the monetary policy transmission mechanism and strengthen the effectiveness of monetary policy. It is a flexible inflation targeting regime whereby headline inflation has, with the concurrence of the finance minister, been set within a range of 2-5 per cent with the aim of achieving the mid-point of 3.5 per cent over the medium term. The new framework supersedes the existing one introduced in December 2006.
With the new framework, the existing Key Repo Rate is being replaced by the Key Rate as the policy rate to be determined by the Monetary Policy Committee. The Key Rate is being introduced at the same rate as the Key Repo Rate, that is, at 4.50 per cent.
The implementation process of the new framework entails changes at the operational level, notably a review of monetary policy instruments to be used for effective management of liquidity conditions.
For the Bank of Mauritius (BoM), the monetary policy framework used so far is not efficient enough. His constraints were the high excess liquidity associated with the increased costs of implementing monetary policy. This affects the transmission mechanism. While the process of implementing the new framework involves changes at the operational level, including a review of the monetary policy instruments to be used for effective management of liquidity conditions. But also, will result in a more transparent framework in line with international best practices
Priority objective of the BoM remains price stability. Ghis explain the introduction of inflation targeting, which is a monetary regime increasingly favored by central banks in emerging economies, the bank will have more vision and room to maneuver with respect to inflationary pressures. For example, the central bank will be able to use its monetary policy instruments based on expected inflation rather than on current inflation.
Cash ratio
Lengthen the maintenance period to 28 days to enable banks to better manage their liquidity banks will be required to maintain reserve balances at the Bank equivalent to 9.0 per cent of their average deposit liabilities held over the preceding 28-day period – both rupee and FX
The daily requirements on both the rupee and foreign currency CRR, currently standing at 6.5 per cent and 4.5 per cent, respectively, will be discontinued balances held in the overnight deposit facility will not count towards the computation of the CRR. The remuneration on the FX CRR will be terminated
Fast-track the reduction in inflation
With the main instrument being offered at the same rate as the KR and the maintenance of the corridor, the Bank seeks to ensure effective transmission of monetary policy signals to money market interest rates
Expectations are that the overnight interbank rate will be within the interest rate corridor, close to the KR
Banks will use the level of the KR and of the overnight interbank rate as reference points to set the yields on Bills of maturity longer than 7 days.
Banks’ savings deposits rates and lending rates will reflect the level of the KR and of the overnight interbank rate
