By Jean Paul Arouff
PORT LOUIS (Reuters) - Mauritius will need to tighten monetary policy if inflationary pressures intensify, the International Monetary Fund (IMF) said on Wednesday, and encouraged the country to adopt a formal inflation-targeting framework.
The IMF said in a statement - just ahead of the Indian Ocean island nation's monetary policy committee meeting on April 28 - that its directors on their yearly consultative mission to Mauritius "cautioned that a withdrawal of accommodation might be necessary if inflationary pressures intensify".
Persistent excess liquidity in the banking system has had an impact on the process in which interest rate changes affect economic activity and inflation, while also encouraging disintermediation and riskier lending, the IMF said.
Central bank governor Rundheersing Bheenick said this month that Mauritius needs to raise its main repo rate by 50 basis points (bps) to meet its year-end inflation target of 4 percent and to begin halting a decade-long decline in saving levels.
Bheenick, who said he was worried by the jump in consumer prices over the past three months, noted that the higher benchmark lending rate would also encourage commercial banks to raise their own rates on deposits, which he said were some 200 bps below inflation.
"To address this issue, (the IMF directors) encouraged the authorities to consider an approach to liquidity management involving additional issuance of government paper for monetary policy purposes and - more broadly - closer collaboration between the government and the central bank," the IMF said.
"They also suggested strengthening the institutional and operational arrangements that would support the eventual adoption of a formal inflation targeting framework," it said.
Mauritius annual average inflation rose to 4 percent in March from 3.9 percent in February according to Statistics Mauritius. The year-on-year rate fell to 4.5 percent from 5.6 percent a month earlier.
(Editing by Drazen Jorgic and Louise Ireland)