(Bloomberg) -- Mauritius increased its key interest rate for the first time in more than a decade, as it sees the war in Ukraine piling on inflation pressures this year.
The monetary policy committee raised the rate to 2% from 1.85%, Governor Harvesh Seegolam told reporters in the capital, Port Louis, on Wednesday. That's the first hike since June 2011 and reverses some of the two cuts totaling 150 basis points in 2020 to aid the economy's recovery from the fallout of the coronavirus.
“We are very concerned by the inflationary pressure building in the country,” said Seegolam. The decision to hike was made “in the face of heightened risks to inflation while continuing to promote macroeconomic conditions conducive to recovery,” he said.
Inflation that surged to a 16-year high of 9% in February is seen averaging 6.7% this year, subject to further headwinds from the Russia-Ukraine war, he said. Mauritius is a net importer of food and fuel and is likely to see sustained pressures on the prices of both due to currency weakness, sanctions on Russia, the world's second-largest exporter of oil, and the war in Ukraine.
Russia and Ukraine ship more than a quarter of the world's wheat exports, and the fighting has closed ports and halted transport.
While the central bank doesn't have inflation targeting it plans to introduce it by the end of the year.
Read: Mauritius Plans Inflation Targeting This Year in Policy Overhaul
The committee expects the economy to expand 7% to 8% this year. The improved outlook allowed the central bank to shift its focus to curbing inflation.
The central bank expects the recovery in the Indian Ocean island nation's tourism-dependent economy to gain momentum after reopening its borders on Oct. 1 to vaccinated tourists. The closure of its borders to tourists in 2020 led to Mauritius's worst contraction in four decades.
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