Monetary Policy Decision - October 2018

The National Reserve Bank of Tonga’s board of directors at its meeting on the 20th December 2018 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, announced that the activities in the domestic economy were positive over the month of October. Total agricultural export volumes rose significantly driven by the squash harvesting season and other variety of root crops. Loans in the secondary sector increased indicating continued vibrant activities within the industry. Banks’ lending to individual housing rose followed by lending to businesses for construction and manufacturing purposes. Partial indicators suggest household disposable income levels increased supported by the increase in remittance receipts and new commitments for personal loans. Reflecting the demand for imported goods, container registrations rose mainly for business containers coinciding with an increase in import payments for wholesale & retail goods as businesses stock up in preparation for the festive season and points to stronger activity in the trade sector throughout the month. The financial services continued to grow supported by strong credit growth. Travel receipts also increased, even though international air arrivals fell over the month coinciding with the decline in the number of flight arrivals.

The banking system continued to remain sound over October 2018 as banks maintained a strong capital position, supported by adequate profits and low level of non-performing loans. Higher deposits by the commercial banks to the Reserve Bank’s vault contributed to expanding reserve money. The banks’ total loans to deposit ratio grew to 73.3% from 72.9% in the previous month, reflecting higher lending outweighing growth in deposits. This ratio continued to remain below the 80% minimum loan to deposit ratio which indicates that there is capacity for further lending by the banks. The weighted average interest rate spread widened over the month due to the increase in the weighted average lending rate.

The foreign reserves rose over the month to $457.3 million as a result of increases in official transfer receipts and lower government payments. This is sufficient to cover for 7.3 months of imports.

The Statistics Department has changed the Consumer Price Index, base period and also extended the coverage of the price changes to include Vava’u. The inflation rate rose over the month of October due to increases in domestic food and catering service prices coupled with increases in imported footwear, roof iron & timber and fuel prices. The headline inflation also rose over the year by 6.2% compared to 5.5% in September 2018. Higher prices over the year were noted for domestic food, tobacco, alcoholic beverages, kava-Tonga, clothing and catering services and imported alcoholic beverages & tobacco, petroleum, clothing & footwear, and liquid petroleum gas.

Tonga’s economic performance remains positive in the medium term, however weather uncertainty pose a risk to the outlook. The foreign reserves are projected to remain at a comfortable level and inflation is likely to decline further. The banking system is to continue to remain strong.

Given the above developments and outlook, the current monetary policy stance is considered appropriate in the medium term. The Reserve Bank continues to adopt measures to encourage the utilisation of the excess liquidity in the banking system to increase lending to support domestic economic activities and strengthen the monetary policy transmission mechanism. The Reserve Bank will continue to remain vigilant and closely monitor external and domestic developments and may change its monetary policy setting to support its monetary policy objectives.


Economics Department
National Reserve Bank of Tonga
Fasi mo e Afi

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

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