Since the 15th of January, Yandraduth Googoolye is the new Governor of the Port-Louis-based Bank of Mauritius. Aged 63, he is a seasoned central banker. In the following questions and answers, he gives his views on his priorities at the helm of the banking regulator.
After a decade as First Deputy Governor with stints in the supreme post for a handful of months, he has the experience to guide the Central Bank during his three-year tenure. He will rely on his First Deputy Governor Renganaden Padayachy and Second Deputy Governor Mahendra Vikramdass Punchoo.
What are your top three priorities at the beginning of your mandate? Why?
Let me begin by referring to some of the provisions of the Bank of Mauritius Act. The general policy of the affairs and business of the Bank, other than the formulation and determination of monetary policy, is entrusted to a Board of Directors. The Governor is the principal representative of the Bank and is responsible for the execution of the policy of the Board and the general supervision of the Bank.
The primary objective of the Bank is to maintain price stability and to promote orderly and balanced economic development. The other objectives are to regulate credit and currency in the best interests of the economic development of Mauritius and to ensure the stability and soundness of the financial system of Mauritius.
Against this backdrop, I must admit that one of my major priorities will be to ensure that the main objectives of the Bank are met. I will ascertain that we stand guided by the Board’s vision and stewardship for the Bank to effectively fulfil its core mandates and efficiently serve the people of Mauritius.
Broadly, our policies will be geared towards guaranteeing a stable economic environment, whilst keeping inflation rate in check and making sure that both the domestic money and foreign exchange markets work efficiently. In sum, the Bank will endeavour to maintain a sound and efficient macroeconomic environment that is conducive to growth.
As you are aware, any central bank is at the helm of the financial services industry. Being responsible for the formulation of monetary policy and the regulation and supervision of banks, the Bank plays a key role in fostering sound and stable financial and real sector conditions. The Bank is already working towards the delivery of a National Payments Switch, which will revolutionise the payments industry in Mauritius.
In addition, work is underway to implement a risk-based approach to bank supervision. This will change the way we assess the soundness of banks and institutions that the Bank regulates. The approach will be enhanced with forward-looking analysis, taking into consideration the prescriptions of IFRS9. All of this is geared towards ensuring the resiliency of our banking industry. Having a safe and sound banking sector is essential for ensuring confidence in our jurisdiction and transforming it into a financial centre of international stature.
The strengthening of the Bank’s monetary policy framework is another area which is close to my vision of ensuring the effectiveness of the monetary transmission mechanism in a small open economy like ours. The modernisation of the financial market infrastructure of Mauritius would be incomplete if we do not work towards building a vibrant secondary market for securities and developing a bond market.
I also view that the banking industry must be professionalised so that we can groom a sufficient pool of local talent. In this regard, I have already initiated discussions with the Mauritius Bankers Association for a programme on capacity building.
Last but not the least, I strongly believe that financial education is of utmost importance, and we will be working with our partners, banks and other (entities) and principally with the Financial Services Commission and Financial Intelligence Unit. We hope to roll out a course of action shortly.
Inflation is on an upward trend. How will the Monetary Policy Committee tackle this at its forthcoming meeting?
As mentioned earlier, our primary objective is price stability and the maintenance of orderly and balanced economic development. You will appreciate that I cannot pre-empt, at this juncture, the stand that the MPC may take at its forthcoming meeting. In the discharge of its functions, it must be noted that the MPC is not be subject to the direction or control of any other person or authority.
In their decision-making process, MPC members examine international as well as domestic economic and financial conditions in light of domestic and international economic and financial data and information, both current and projected. The MPC, which I will chair on 28th February 2018, will assess the risks to domestic inflation as well as to domestic growth. And, depending on this assessment, only then a decision on the Key Repo Rate will be reached.
Allow me to comment on the uptrend in the rate of inflation, which must be put in its context as it reflected past base effects as well as temporary supply shocks that have affected the consumer’s basket of goods and services. Demand pressures have, however, remained subdued. A reading of the changes in the consumer price index in 2017 shows that higher prices for vegetables and some other food products, alcoholic beverages, tobacco, gasoline and diesel have mostly pushed the CPI higher.
Thus, headline inflation rose from 2.4 per cent in June 2017 to 3.7 per cent in December 2017 and is foreseen to rise further, as it will also carry the effects of past increases. This is because headline inflation compares the average level of prices, as measured by the CPI, during a twelve-month period compared with the average level during the corresponding previous twelve-month period. A better assessment of the rise in prices is provided by examining the year-on-year change in the CPI, which declined from 6.4 per cent to 4.2 per cent over the same period.
Like most central banks across the world, we use measures of underlying inflation to gauge the build-up in inflationary pressures. That is why we also monitor the developments in CORE1 and CORE 2 inflation rates. Although core inflation measures increased, we view that they have been broadly stable and contained.
Inflation expectations have also been more or less contained. We will focus on narrowing the inflation differentials with our major trading partners and ensure that our policies are geared towards supporting the competitiveness of the Mauritian economy.
The repo rate is at its lowest. It was cut to give a boost to investment and growth. Can it slide further? Are we at the end of an accommodative policy? Why?
It may be noted that globally, policy rates of most central banks have been at a floor in the aftermath of the global economic crisis. Most central banks have ensured that monetary policy, one of the major economic tools, remains accommodative to support economic expansion given that inflation was subdued. Some countries even had zero or negative interest rates.
During 2017, the Key Repo Rate was left unchanged at the first two meetings of the year but at the September 2017 MPC meeting, it was cut by 50 basis points to 3.50 per cent. The MPC reached the decision after carefully reviewing several economic variables both on the domestic and international fronts. The accommodative stance taken by the Bank so far has helped to support domestic economic activity. And this is justly one of the mandates of the Bank.
The decision to change the Key Repo Rate is taken by the MPC and the final decision is taken on majority vote. Whether we have reached the end of an accommodative cycle is presumptuous at this stage. We should leave it to the MPC to do this assessment. The Bank has significant research and analytical capacity to provide valuable insights on economic and financial developments.
Investment spending has been firming lately and is expected to support growth momentum in 2018. The change in the Key Repo Rate has attenuated borrowing costs. Lately, an increase in private sector credit has been noted. Nonetheless, it must be pointed out that the level of investment does not depend solely on interest rates but on other factors which can be beyond the control of the central bank.
The market is flushed with rupees and dollars. What are the options available to curb the problem?
We are aware that the excess liquidity situation has been there for quite some time. The Bank has been conducting open market operations to partly contain the growth in rupee excess liquidity as well as sterilized foreign exchange market intervention.
The Bank intervenes on the domestic foreign exchange market to smooth out undue volatility in the rupee exchange rate, taking into consideration that the level of the rupee should be in line with its fundamental value. The amount of Bank of Mauritius interest-bearing instruments outstanding as at 26th January 2018 stood at about Rs71 billion, which is quite sizeable and costly to the Bank.
We will consider the best options available to contain the level of excess liquidity to a tolerable level so that this does not hinder market developments as well the transmission mechanism of monetary policy. I must point out that discussions with banks have indicated that they have the willingness to maintain some buffer of rupee excess reserves. The Bank will maintain its sterilized intervention strategy, as warranted, simultaneous to conducting active open market operations.
What are your plans so that the country has a vibrant bonds market?
A well-developed, deep and efficient domestic bond market is paramount for developing a domestic investor base, which can help to reduce reliance on foreign savings for the financing of domestic activities. The development of bond markets will definitely improve the intermediation of savings within the economy. Bond markets are an effective way to intermediate capital savers with capital users. Moreover, in promoting bond market development in our country, we will improve the structure of our financial system.
Deeper bond markets will enable our Central Bank to conduct monetary policy in a more effective manner. The global financial crisis has shown that development of a local investor base may help reduce contagion effects across financial markets. Development of the bonds market also provides a myriad of domestic assets to investors that helps to reduce asset-price inflation while at the same time mitigates currency and maturity mismatches in the balance sheets of financial and non-financial corporates.
We will support the development of the bond market and work together with relevant authorities to develop a roadmap to this effect. Lately, there has been an escalation of issuance of corporate bonds by some big corporates. And we need to monitor these developments to assess risks associated with such issues, especially in relation to financial stability.