Monetary Policy Decision

The National Reserve Bank of Tonga’s board of directors at its meeting on the 7th September 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 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, stated that local partial indicators reflected a generally positive growth in June 2017. From the primary sector, despite the slight decline in agricultural exports by 49.0 tonnes (6.1%) marine exports recorded the highest volume of exports for the year so far at 399.8 metric tonnes, as 6 foreign vessels unloaded their catch at Tonga’s port. The activities in the secondary sector also showed positive activities. Individual housing loans and business construction loans increased by $2.4 million (1.1%) and $0.5 million (5.0%) respectively over the month which supported the construction sector. The services sector indicated a mixed growth over the month as container and vehicle registrations declined by 4.2% and 13.0% respectively. However, international arrivals increased by 14.4%, attributed to the annual church conferences and the whale watching season. This supports the tourism sector and spillover effects to other sectors such as the transportation and trade sectors.

The banking system remained sound maintaining strong capital position, supported by comfortable profitability, and continued low non-performing loans. Liquidity in the banking system (reserve money) fell to $283.8 million as a result of higher cash withdrawal made by the commercial banks from the Reserve Bank’s vault. The loans to deposit ratio of banks rose to 75.4% from 74.5% last month, but remained below the 80% loan to deposit ratio target which indicate that excess liquidity in the banking system remains and the capacity for further lending by the banks exists. Furthermore, the weighted average interest rate spread widened to 5.7% due to a decline in the decline in the weighted average deposit rate, more specifically, demand deposit and saving deposit rates whilst the weighted average lending rate rose slightly.

The foreign reserves rose by $15.6 million to $407.9 million in June 2017 due mainly to the receipt of grants by the Government for technical assistance and other current expendituresduring the month. This is equivalent to 7.4 months1 of import cover, which is still above the Reserve Bank’s minimum range of 3 – 4 months.

The annual headline inflation rose by 10.3% over the year to June 2017. This was due to mainly to an 11.7% rise in imported prices which largely reflected the impact of the new customs duty and excise tax introduced in July 2016. Similarly, the domestic annual inflation rate rose by 8.7% largely driven by the seasonality of local food, rise in electricity price, and the continued short supply of kava-Tonga.

The Reserve Bank’s expectation for strong economic activity remains in the near term. The level of foreign reserves is also projected to remain adequate supported by estimated higher receipts of remittances and foreign aid and this will be partially offset by the expected increase in imports. Upward inflationary pressure remains in the near term due mainly to the impact of the new customs duty and excise tax effective on 1st July 2016, although it is expected to fall below the Reserve Bank’s inflation reference rate of 5% per annum in August 2017. However, 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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