Monetary Policy Decision

The National Reserve Bank of Tonga’s board of directors at its meeting on the 30th October 2017 approved to maintain its current monetary policy measures outlined below. This is to encourage utilisation of the excess liquidity in the banking system, through further lending, particularly to the growth sectors, in order to support economic growth, and strengthen the monetary policy transmission mechanism.

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%; and
d. maintain the inflation reference rate at 5%.

The Governor of the Reserve Bank, Sione Ngongo Kioa, reported that the local economic activities were vibrant over the month of August. Total agricultural export volumes rose by 335.4 tonnes, reflecting the commencement of the squash season and higher export of cassava. This was supported by a 7.1% growth in lending to agricultural sector. On-going construction activities continued to boost performance in the secondary sector, supported by a 0.7 million KwH rise in electricity consumption. Increase in business loans for manufacturing also support this sector’s expansion. The number of air arrivals rose by 527 passengers benefitting the activities in the tourism sector. The total number of container registrations increased by 377 registrations and 374 vehicles were registered in August, 46.4% and 34.1% higher than the previous month respectively. This echoed an active trade sector and spillover effects to the transportation sector.

The banking system remained sound maintaining strong capital position, supported by comfortable profitability, and non-performing loans continued to remain low. Despite the rise in Statutory Required Deposit from 5% to 10% last month, liquidity in the banking system (reserve money) increased over August to $282.9 million. This was due to higher deposits which largely resulted from receipt of funds for the sale of shares in Tonga Cable Limited. The banks’ total loans to deposit ratio slightly fell in August to 75.2% from 76.3% last month, due to an $18.6 million (3.5%) increase in deposits outweighing a credit growth of $8.5 million (2.1%). This ratio continues to remain below the 80% loan to deposit ratio target which indicates excess liquidity in the banking system remains and that there is capacity for further lending by banks. The weighted average interest rate spread widened slightly to 5.680% over August. This was a result of the decline in the weighted average deposit rate outweighing the decline in the weighted average lending rate.

The foreign reserves however declined by $3.9 million to $405.0 million in August 2017 due to the deficit in the overall overseas exchange transaction balance which was largely attributed to higher import payments. This is equivalent to 6.9 months1 of import cover, which is still above the Reserve Bank’s minimum range of 3 – 4 months.

The annual headline inflation slowed further to 5.2% in August 2017, slightly higher than the Reserve Bank’s reference rate of 5%. Imported food prices drove the annual inflation rate for items such as mutton flaps, butter, sugar, Winfield blue and alcohol. The revised excise duties on certain products that was introduced last month contributed to the rise in imported prices. The short supply of kava-Tonga, seasonality in local produce and higher electricity prices over the year drove the inflation on domestic goods.

The Reserve Bank’s outlook for strong domestic economic activity remains in the medium term. The level of foreign reserves is also expected to remain at comfortable levels supported by expected higher receipts of remittances and foreign aid. This will be partially offset by the projected rise in imports. Upward inflationary pressure remains in the near term, however it is expected to fall below the Reserve Bank’s inflation reference rate of 5% per annum in 2017/18. The adverse weather conditions and higher import prices poses a risk to these favorable projections.

The Governor concluded that the Reserve Bank will continue to closely monitor developments in the domestic and global economy and update its monetary policy setting, to maintain internal and external monetary stability, and to promote a sound and efficient financial system in order to support macroeconomic stability and economic growth.

The Reserve Bank will also remain vigilant and continue to closely monitor developments for early signs of vulnerabilities which may indicate overheating of the economy.

1 - Methodology used for this calculation has changed to include both imports of goods and services whilst the calculation used in previous reports used import of goods only.


Economics Department
National Reserve Bank of Tonga

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

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