Monetary Policy Statement for February 2016

At its meeting today, the National Reserve Bank of Tonga (NRBT) Board approved the release of its Monetary Policy Statement (MPS) for February 2016. This Statement reviews Tonga’s economic growth and the NRBT’s conduct of monetary policy in the six months to February 2016. It also provides the NRBT’s outlook for the next six months.

The NRBT is tasked with the objectives to maintain internal and external monetary stability, promote financial stability and a sound and efficient financial system, and to conduct its activities in a manner that supports  macroeconomic stability and promote economic growth by ensuring adequate level of foreign reserves and low and stable inflation is maintained. In the past six months to February 2016, these objectives were observed.

Tonga’s economic growth prospects look promising as the NRBT projected strong real gross domestic product (GDP) growth over the three consecutive financial years 2014/15 through to 2016/17. Growth is expected to be driven by the construction, trade and tourism sectors. The Department of Statistics has yet to release its official estimates of real GDP growth for 2014/15 financial year however the NRBT estimated the economy to have grown strongly in 2014/15. The NRBT’s estimates were slightly revised upwards to 2.6% from the previously published projection in the August 2015 MPS of 2.5% due to new data received for the fisheries sector. In 2015/16, the NRBT expects the economy to have expanded by 3.3%, consistent with the International Monetary Fund (IMF) Article IV’s projection of a 3.1% growth. Looking forward, the NRBT anticipates economic growth to slightly ease to 1.9% in 2016/17. This
follows after a period of strong growth in the previous year.

Inflationary pressures continued to ease in 2015 as annual deflation was recorded almost throughout the entire year. On an annual basis, February 2016 recorded a deflation of 0.3% compared with a deflation of 1.2% in February 2015 which is well below the NRBT’s reference range of 6-8%. Inflation is expected to continue to remain low in the remaining months of 2015/16 and to record an annual deflation of 0.6% in June 2016 then increase to a peak of 3.8% annual inflation at the end of 2016 on the back of world commodity prices starting to pick up.

The level of foreign reserves continued to rise and remained above 3-4 months of import cover bolstered by higher export proceeds and travel receipts, higher remittances, and also the receipt of foreign aid from donor partners for the Government. In February 2016, the foreign reserves reached another record high of $328.5 million, sufficient to cover 9.3 months of imports, which is well above the NRBT’s minimum range of 3-4 months. The NRBT expects the level of foreign reserves to remain comfortably above the minimum range up to June 2017.

The financial system remained sound over the 6 months to February 2016 as the banking system continued to be profitable and maintained strong capital and liquidity positions. Broad money and banking system liquidity increased to a new record high as total credit and deposits continued to grow. Furthermore, the banks’ weighted average interest rate spread narrowed compared with the 6 months to August 2015.

It is anticipated that government receipts will increase in the near term from budget support, issuance of government bonds and other new revenue streams. The NRBT will closely monitor the implication of fiscal policy measures on the monetary policy objectives.

With inflation remaining low; foreign reserves remaining comfortably above the minimum range of 3-4 months of import cover; exchange rates being competitive; the financial system remaining sound as it maintained strong capital and liquidity positions, weighted average interest rates narrowing; and the positive outlook for the domestic economy, the NRBT Board of Directors approved to maintain the current accommodative monetary policy stance. However, as the 2016 IMF Article IV mission had recommended, the NRBT will remain vigilant and closely monitor early signs of vulnerabilities. At the same time, the NRBT is reviewing and imposing new policies to enhance its role in promoting macroeconomic and financial stability.


Read the Monetary Policy Statement for February 2016 here.

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