BOM Increases Key Interest Rate to 5.25% on Inflation

Mauritius’s central bank increased its benchmark interest rate by half of a percentage point to curb inflation that has climbed faster than expected as economic growth accelerates.

The repo rate rose to 5.25 percent, the Port Louis-based Bank of Mauritius said in a statement on its website today after a meeting of the monetary policy committee. The increase pares a 1 percentage-point reduction in September that took the rate to the lowest level since December 2006.

Since that rate cut, inflation has accelerated. The annual measure jumped for a fifth consecutive month to a more than two- year high of 6.8 percent in February, according to the Indian Ocean island nation’s statistics agency. Bank of Mauritius Governor Rundheersing Bheenick forecast in December that inflation will be at 7 percent in June.

“In the light of this and the expected narrowing of the output gap, the MPC considered it important to start the process of normalizing the key policy rate,” the central bank said. Annual inflation could reach 7.8 percent by June if no monetary policy changes are made, it said.

The economy will expand more than previously forecast, with growth at 4.6 percent this year after 4.4 percent expansion in 2010, the bank said. The government had estimated growth of 4.2 percent in 2010 and 2011.

“I’m surprised as 70 percent of the country’s inflation is imported,” Kriti Taukoordass, an economist and partner at Port Louis-based advisory company Mazars, said by phone today. “This is not the right policy response. The decision will hardly drive down inflation. The increase will favor only savers.”