Monetary Policy Decision - February 2021

The National Reserve Bank of Tonga’s Board of Directors at its board meeting on the 1st of March 2021, approved to maintain its current monetary policy measures outlined below. This is to encourage utilization of the excess liquidity in the banking system, through further lending to growth sectors and to support the economy from the impacts of COVID-19.

a.  Maintain the monetary policy rate at 0% (zero interest rate policy).
b.  Maintain the minimum loans/deposit ratio of 80%.
c.  Maintain the Statutory Reserve Deposit ratio at 10%.
d.  Maintain the inflation reference rate at 5%.
e.  Monitor the commercial banks' liquidity and adjust the SRD ratio if needed.
f.  Monitoring the commercial banks’ capital reserves and adjust further when required.
g.  Ease the exchange control requirements when required.
h.  Continue to issue Government Bonds.
i.  Maintain clear channels of effective communications with the financial institutions for adequate preparedness.
j.  Continue to be transparent and raise awareness of its monetary policy decisions through press releases to the public.
k. Closely monitor the impacts of the pandemic in the financial system for early detection of any signs of vulnerability.
l.  Continue to ensure both commercial banks and non-bank financial institutions adheres to all Government declarations regarding COVID-19 in the workplace while delivering essential financial services to the public.

The Governor of the Reserve Bank, Sione Ngongo Kioa, reported that there are mixed performances in domestic activities for December 2020. However, looking at the overall performance for year 2020, sectoral outputs, consumptions activities and investment are contracting. This owes largely to the extended border lockdowns and disruptions from COVID-19 severely impacting the tourism sector and weakens aggregate demand. While great uncertainties still remain on the outlook, there is some positive uptake on the recovery of the global economy and the vaccination outturn.

Annual headline inflation has returned to a positive growth of 0.3% in December 2020 after dipping into negative territory since June 2020. The rebound stems from an increase in import prices of food, tobacco and alcoholic beverages. This more than offset a decline in domestic prices due to lower prices or electricity, gas and other fuels. While inflation is expected to gradually pick up, it is estimated to be below the NRBT’s reference rate of 5%.

Official foreign reserves continue to rise strongly in December 2020 to $675.6 million, equivalent to 11.5 months of imports, well above the 3 months minimum threshold. This attributes to the generous inflow of budget support and official grants from development partners to assist Tonga’s recovery from COVID-19 and recent cyclones. Additionally, remittance receipts continue to hold up further supporting foreign reserves.

The total banking system remains stable supported by strong capital and liquidity positions. However, lending contracted by 1.1% in the year to December 2020, resulting in the decline in loans to deposit ratio to 68.6%, which is below the 80% minimum. This reflects the weak investment appetite in the market, and banks becoming more risk averse. Nevertheless, the prolonged contraction in the economy puts pressure in the financial system with regards to loan repayments and non-performing loans. The Banking Supervision unit is closely monitoring these emerging risks to ensure that financial stability is maintained. The weighted average interest rate spread also narrowed over the year to 5.7% owing mostly to lower weighted average lending rates.

On the latest review of the Reserve Bank’s GDP forecast, the expected downturn for 2019/20 and 2020/21 still remains, with a worsening outturn for 2020/21 than previously expected. The economy is expected to start recovering by 2021/22. The outlook for foreign reserves is still expected to be well above the 3 months minimum threshold of import cover, while inflation is also expected to remain below the 5% reference rate. The banking system is expected to remain stable supported by high liquidity and capital. Meanwhile, the Reserve Bank continues to be vigilant in closely monitoring its economic and financial indicators and stands ready to adjust its monetary policy settings if needed to maintain internal and external stability and support macroeconomic growth.



Economics Department
National Reserve Bank of Tonga
Fasi mo e Afi

Telephone: (676) 24057
Fax: (676) 24201

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Press Release in English
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Press Release in Tongan
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