Mauritius Cuts Rates by Biggest Margin Since 2012 on Brexit in July

Mauritius, Capital Markets in Africa: The Bank of Mauritius reduced its benchmark interest rate by the biggest margin in more than four years, saying Britain’s decision to leave the European Union has damaged the Indian Ocean island nation’s growth outlook.

The Monetary Policy Committee unanimously decided to lower its benchmark rate to 4 percent from 4.4 percent, Governor Rameswurlall Basant Roi told reporters Wednesday in the capital, Port Louis. The gauge had remained unchanged since November 2015, when it was lowered by 25 basis points, the first reduction in more than two years.

“Taking into account the uncertainty created by Brexit and potential for the U.S. November elections to increase market volatility, the MPC deemed it important to support investment activity in the country and raise the growth potential of the economy,” Roi said. “A cut in the key repo rate is warranted at this juncture to support the economy.”

Last month, the Bank of Mauritius said it had increased its gold and foreign-exchange reserves to reduce any potential fallout from Britain’s decision last month to leave the European Union. The U.K. accounts for 12 percent of Mauritius’s exports and tourists, Roi said.

Headline inflation has remained low, with the rate rising by 0.9 percent in June from 1.3 percent in January, against a backdrop of muted domestic demand, Roi said. The rate is now projected at about 1.5 percent for 2016 and about 3 percent next year, slightly lower that what was anticipated at the last MPC meeting, he said.

Mauritius’s $12 billion economy, dependent on sugar, tourism, manufacturing and financial services, could expand by 3.6 percent this fiscal year, from 3 percent a year earlier, according to the finance ministry.

“The 0.4 percent cut shows the urgency of the situation with Brexit, the low level of investment in Mauritius and the slowdown of the GDP growth,” Eric Ng, economist and director of Pluri Conseil, said by phone from Port Louis. “What is unfortunate is that the Bank of Mauritius has favored a monetary policy that primarily supports a handful of exporters.”

The central bank forecasts a current-account deficit of 5 percent of gross domestic product in 2016, unchanged from last year. Private sector credit growth is decelerating and big companies are not borrowing but repaying their debts instead, while investment is not picking up, Roi said.

Finance Minister Pravind Jugnauth, who presents the government’s budget on July 29, has said he has limited room for maneuver in the 2016-17 spending plan as the country faces a host of local and international headwinds.