Outlook

The ongoing geopolitical tensions in the Middle East and heightened global uncertainty are expected to weigh on domestic economic activity through supply-chain disruptions, higher input costs, and weaker external demand. These pressures could be further intensified by the current El Niño conditions, which may adversely affect agricultural production and increase Tonga’s exposure to climate-related shocks.
The inflation outlook remains uncertain and will largely depend on developments in the Middle East and global commodity markets. Elevated global oil prices are expected to increase the cost of goods and services, with inflationary pressures potentially persisting if prices remain elevated. Given Tonga’s limited domestic production capacity, the risk of external cost pressures passing through to domestic prices remains high. El Niño conditions could further add to inflation risks through impacts on food supply and prices.
Official foreign reserves are projected to remain above the minimum adequacy thresholds in the near term, sustained by external receipts. While reserves are projected to remain adequate over the medium term, the outlook remains uncertain and tilted to the downside, particularly with the ongoing crisis in the Middle East.
The financial system remains sound, supported by strong capital positions and adequate liquidity conditions. However, credit growth is expected to remain subdued due to existing loan portfolio conditions and banks’ cautious lending stance.
Against this backdrop, the NRBT and the Government will continue to closely coordinate their policy responses to mitigate emerging inflationary and external risks. The NRBT remains committed to modernizing its monetary policy framework and strengthening policy transmission, maintain financial stability, and build resilience against future shocks.

Global risks and inflationary pressures continue to weigh on the outlook 

The IMF World Economic Outlook Update for July 2026 projects global growth to slow from 3.5% in 2024–25 to 3.0% in 2026, before recovering to 3.4% in 2027. The moderation reflects the impact of the Middle East conflict, particularly through higher energy prices and increased uncertainty, partly offset by stronger demand from the global technology cycle. Global inflation is projected to rise from 4.1% in 2025 to 4.7% in 2026 before easing to 3.9% in 2027.
Inflation pressures have begun to ease in some advanced economies. Headline inflation in the United States and Australia moderated in mid-2026, while New Zealand’s Reserve Bank raised the Official Cash Rate to 2.5% in response to persistent inflation risks and evolving economic conditions.

Domestic activity regained momentum

In May 2026, agricultural exports rebounded by 194.7 tonnes (34.4%) to 760.4 tonnes. This was largely driven by higher shipments of root crops, particularly taro, cassava and yam. Despite the higher volumes, proceeds fell by $0.24 million (18.4%) to $1.1 million, underpinned by lower receipts from coconut and watermelon exports. In year-ended terms, total export volumes increased by 1,561.3 tonnes (21.8%) to 8,726.6 tonnes, underpinned by the increases in root crops. Meanwhile annual proceeds picked-up by $4.7 million (91.5%) to $9.9 million, reflecting higher receipts from root crops and watermelon exports.

The industrial sector remained supported by ongoing construction of the new Parliament building, church buildings and road upgrades. Construction of the Fangaʻuta Lagoon Bridge progressed with advanced pile testing undertaken in May to validate the bridge’s foundation design. Meanwhile, the Ministry of Health extended engineering design bidding process for the Vaiola Hospital upgrade to shift focus on urgent wastewater remediation.

Services sector activity moderated in May 2026. Imported containers declined by 120 (14.3%) to 720, reflecting decreases in business and private imports by 108 and 12 containers, respectively. Import payments excluding oil fell by $4.9 million (10.4%) to $41.9 million, while wholesale and retail imports declined by $4.1 million (13.2%) to $26.7 million, following stronger activity in previous months. Over the year, total container imports declined by 86 (0.7%) to 11,896, driven by lower business imports, while private imports increased by 71 (4.4%) to 1,695. Vehicle registrations also fell by 60 (19.0%) to 256 during the month but increased by 419 (12.9%) over the year to 3,674, reflecting higher registrations of light vehicles, buses, taxis, and rental vehicles. Travel activity, however, remained firm. Tourist arrivals increased by 1,113 (14.9%) to 8,564, supported by family month activities and church conferences, while departures declined by 496 (6.1%) to 7,615. Travel receipts increased by $2.3 million (13.9%) over the month to $18.5 million and by $26.3 million (14.8%) over the year to $203.9 million, underscoring sustained growth in tourism.

Headline inflation rose further to 7.9% 

Annual headline inflation increased to 7.9% in May 2026, up from 5.5% in April and significantly higher than the 0.9% a year earlier. Imported prices increased by 11.7%, driven mainly by housing utilities, international airfares and transport costs. Domestic prices rose by 4.5%, reflecting higher housing utilities, utilities, transport and restaurants & hotels.

On a monthly basis, the Consumer Price Index increased by 3.0%, reflecting broad‑based gains in imported and domestic prices. Imported prices rose by 3.2%, led by food and non‑alcoholic beverages, housing utilities, and transportation. Domestic prices climbed by 2.8%, driven by food and non‑alcoholic beverages, housing utilities, and transportation.

Core inflation eased slightly to 9.4% in May 2026, down from 9.5% in April but higher than the 9.3% a year earlier. Domestic core items contributed 4.1 percentage points (pp), led by transportation, education, restaurants, and hotels, while imported core items added 5.3 pp, reflecting higher passenger transport costs.

Job advertisements increased

Job advertisements rebounded in May 2026, with 68 vacancies advertised compared to 57 in April 2026. The increase was broad‑based, with more postings across the industry sector and services sector. In year-ended terms, job advertisements fell by 4 (0.4%) to 895 compared to May 2025, indicating broadly stable labour demand, though annual growth has softened.

Nominal effective exchange rate fell

The Nominal Effective Exchange Rate (NEER) decreased by 0.4% in May 2026, reflecting the depreciation of the TOP against the NZD and AUD. Over the year, the NEER also declined by 0.1%, underpinned by the stronger NZD, AUD, and JPY. In contrast, the Real Effective Exchange Rate (REER) increased by 2.0% over the month and 3.9% over the year.

Foreign reserves increased

In May 2026, foreign reserves increased by 3.4% to $970.9 million, supported by higher inflows of official grants and remittances. This level is sufficient to cover 11.3 months of imports, remaining above the optimal threshold of 7.5 months. Over the year, foreign reserve increased by $99.3 million.

Remittances increased

Remittances receipts grew by $6.5 million (13.1%) in May 2026, driven mainly by increases in private transfers ($5.0 million) and employee compensation ($1.3 million). By currency, AUD remittance rose by $3.3 million followed by increases in NZD and USD remittances by $1.9 million and $1.0 million, respectively.

Monetary aggregates peaked in May 2026

In May 2026, reserve money (liquidity) reached its highest level, rising by $27.7 million (4.2%) over the month and $83.0 million (13.8%) annually. These increases reflected higher balances in other deposits, which mainly reserve bank notes, alongside growth in Statutory Required Deposits (SRD) and Currency in Circulation (CIC), which outweighed declines in Exchange Settlement Accounts (ESA).


At the same time, broad money also climbed to a record high, increasing by $46.0 million (4.6%) over the month and $112.3 million (12.1%) annually. Both net foreign assets and net domestic assets contributed to this growth. Foreign assets rose in line with higher foreign reserves, while domestic assets increased due to greater NRBT notes holdings and lower deposits with the central bank.

 

Total lending reached highest record 

In May 2026, the total bank lending rose both monthly and annually, increasing by 0.5% ($3.1 million) and 1.7% ($10.2million) to reach a new high level of $615.1 million. The monthly growth was driven by higher lending to businesses in professional & other services, constructions, and entertainment & catering sectors. In contrast, household loans declined across all categories, led by lower housing loans. Annually, both businesses and household loans increased. Business growth was concentrated in construction, distribution, and professional & other services sectors, while household lending was supported by increases in other personal and vehicle loans.
Lending from the Government Development Loans scheme rose over the month by 9.4% ($0.9 million) but declined annually by 6.1% ($0.6 million). Meanwhile, the loan to deposit ratio decreased to 58.2%, as deposits growth outpaced lending increases, both monthly and annually.
The non-performing loans (NPLs) to total loans ratio increased slightly to 14.4%, compared with 14.3% recorded last month and higher than the 13.8% last year. Majority of these NPLs are business loans.

Interest rate spread widened

The weighted average interest rate spread widened over the month and annually by 1.2 basis points (bp) and 8.3 basis points (bp) respectively, to 6.1%. Over the month, the decline in weighted average deposit rates offset the fall in weighted average lending rates. The lower deposit rates reflected decreases in savings and demand deposits. Lending rates also fell, mainly for businesses in the transport, professional & other services, and distribution sectors. In contrast, household loan rates rose across all categories, led by higher vehicle loan rates, followed by other personal and housing loans.

Annually, the weighted average lending rates increased and outweighed the slight decline in deposit rates. The rise was driven by higher rates offered to businesses within the professional & other services, manufacturing, and tourism sectors. Household loan rates followed the same upward trend as observed monthly, with all categories increasing, again led by vehicle loans.