Tuesday, December 9, 2008

Repo Rate Drops by 100 Basis Points Even Though Inflation is Still High

And inflation is still high because back in the second half of 2006 Rama Sithanen and Ramesh Basant Roi issued a fatwa on our rupee after Sithanen removed subsidies on rice and flour in an environment of agriflation and ferocious bean-counting, rapidly rising oil prices and record FDI pouring into Mauritius.

Although inflation came down to 8.3% at the end of last month it's still more than twice the level that would be consistent with the notion of price stability. For instance in the UK it's 2%, at the ECB it is less than 2% (thanks to the Bundesbank) and in Canada it is between 1% and 3%.

Our rate of inflation would have been even lower if Manou Bheenick hadn't been working in difficult conditions: he inherited double-digit inflation and entrenched inflationary expectations from his predecessor and a Minister of Finance who appoints far too many people at the Bank of Mauritius even though he doesn't believe in an independent Central Bank.

For sure appointing Bheenick at the Bank of Mauritius has improved the odds of Ramgoolam staying on as PM after 2010 by containing Sithanen's pathological addiction to robust inflation. These odds can be further improved if the Bank of Mauritius Act is modified so that its Board and Monetary Policy Committee members are nominated in consultation with the Prime Minister and/or if the ultimate Bretton Woods puppet is sacked unceremoniously. The Government Audit Report is the latest of a long string of blunders that could be used as justification.

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