Monetary Policy Statement
To comply with the NRBT Act s50A, the Bank is to publish a Monetary Policy Statement at least every six months. Each statement is a review of economic developments and the conduct of monetary policy in the period since the previous statement. This statement indicates how the Bank intends to conduct monetary policy over the coming six months to achieve its objectives of maintaining sufficient foreign reserves and promoting price stability.
Monetary Policy Statement
February 2025
Inflation has eased moderately, but cost of living in Tonga remains elevated, higher than our neighbouring countries. Headline inflation has moderated to 1.2 percent in December 2024, down from 5.4 percent in June 2024. Imported inflation has eased due to lower energy prices, while domestic prices have declined due to improved agricultural harvests and lower electricity tariffs. Meanwhile, accumulated high inflation from previous years has solidified into domestic cost structures, lifting the overall cost of living higher. Tonga’s accumulated inflation is much higher compared to Fiji and Samoa in the past 8 years by 25 percent and 15 percent, respectively. Over the past 4 years leading to 2024, domestic inflation outpaced imported inflation by 3 percent. This trend and elevated costs of living highlight the urgent need for supply-side fiscal intervention aimed at reducing base costs and increasing supply.
Headline inflation is expected to remain below the 5 percent reference rate in the near term, but risks to inflation remain high, including risks of another surge in domestic inflation. Global policy uncertainties and vulnerability to natural disasters may reignite inflationary pressure in the near term. The Reserve Bank will continue to monitor these risks and adjust monetary policy accordingly to ensure price stability.
Foreign reserves are currently above benchmark levels, but is on a declining trend. To deepen economic stability, it is essential to mobilize additional foreign reserve receipts. Foreign reserves remained at adequate levels, $878.0 million in January 2025, and is expected to remain above the recommended level of 7.5 months of imports in the near term. However, the expected increasing import expenditures and debt servicing will put pressure on the level of foreign reserves.
Financial stability is maintained, however, vulnerabilities to asset quality warrants stronger oversight. Non-performing loans have increased above the 10 percent threshold, but the NRBT is implementing enhanced risk-based tools to ensure further risks to banks’ asset quality are mitigated. Though credit growth has improved, Tonga’s interest rate spread have remained relatively wide at 6 to 7 percentage points for years. This is also indicative of market inefficiencies with lending interest rates driven more by external factors such as cost of doing business and country risk factors, while deposit rates remain low with the persistent excess liquidity.
Tonga’s economic recovery is weak and volatile. The NRBT estimate remains at 2.6 percent growth for the Tongan economy in FY2024-25, stronger than the estimated 1.6 percent growth for FY2023-24. However, the outlook for FY2025-26 projects a slower growth of 2.0 percent.
Monetary policy transmission mechanism in Tonga has been weak. The persistent excess liquidity has largely limited the impact of monetary policy, coupled with an under-developed domestic financial market. Part of the excess liquidity is contributed by the Government. The inflationary trends were driven mainly by supply-side constraints, beyond the Reserve Bank’s control.
The Reserve Bank looks to enhance its monetary policy tools so that it can have a greater influence on inflation in order to achieve its price stability mandate in the future. Coordination with fiscal policy is also needed to achieve this goal, in addition to more effective communication of the monetary policy to guide the market’s expectations.
The Reserve Bank further considers that an accommodative monetary policy stance is appropriate for the next six months to support economic recovery while macroeconomic conditions are favourable. As inflation is expected to stay below the reference rate (assuming no external shocks), and with a comfortable outlook on foreign reserves, the Reserve Bank has the flexibility to adopt a more accommodative stance to support economic growth. However, achieving sustained growth and macro-economic stability requires addressing complex challenges through comprehensive strategies, and measures. These include reforms, financial sector development, prudent external sector management, vigilant inflation control, and proactive risk mitigation. Effective coordination with fiscal policy is essential to the success of these efforts.
Monetary Policy Statement Releases
2025
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February Released on 6 March 2025 | 2,181 KB |
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