Since the last Monetary Policy Statement (MPS), activities in the real sector have generally improved in 2014/15. This supports the National Reserve Bank of Tonga’s (NRBT) estimate of 2.5% growth in Real Gross Domestic Product (GDP) in 2014/15, compared to a 2.0% growth in 2013/14 as released by the Department of Statistics, and higher than the 2.2% growth estimate in the February 2015 MPS. The upgrade in the 2014/15 growth estimate is mainly driven by improved growth in the secondary and tertiary sectors due to major events in mid-2015 such as the coronation, school reunions and church conferences, outweighing the continued negative growth in the primary sector. Consumer prices decreased over the year to August 2015 by 1.1%, in line with the deflation rate recorded in February 2015. The lower global energy and food prices contributed to the fourth month deflation since February 2015.

Gross official foreign reserves increased significantly over the past six months, reaching a new record high of $310.9 million by August 2015. Lower net current account deficit, receipt of foreign aid and Government budget support from development partners, and increase in remittances were the main reasons for this increase. Foreign Reserves as a ratio of imports have remained high at 8.6 months at the end of August 2015, well above the NRBT’s minimum range of 3-4 months. The Nominal Effective Exchange Rate (NEER) and the Real Effective Exchange Rate (REER) both declined over the six months to August 2015 due mainly to the general depreciation of the Tongan Pa’anga against currencies of its major trading partners and Tonga’s lower inflation. This indicates an improvement in Tonga’s price competitiveness against that of its major trading partners.

Tonga’s financial system remains sound as the banking system continued to be profitable with strong liquidity and capital position maintained. Monetary conditions improved as total credit and deposits continued to grow, and the banks maintained narrow weighted average interest rate spreads. Broad money increased to its highest level, consistent with the high banking system liquidity.

Net credit to government increased by 11% in the six months to August 2015, after declining by 5% in the six months to February 2015. This reflects a fall in government’s deposits due mainly to the settlement of the Government’s end-of-year obligations.

Looking forward, the NRBT anticipates strong growth of 3.3% for 2015/16, an upward revision from the estimated growth of 3.2% in the February 2015 MPS. This is supported by a rebound in primary production, particularly the agricultural and fisheries sectors.

Headline inflation will continue to remain relatively low until the end of this calendar year supported by the declining global oil prices and low imported food prices.

The NRBT expects a high level of foreign reserves to be maintained in the near term, well above the NRBT minimum range of 3 – 4 months of import cover. Remittances are anticipated to remain high, though may be slightly lower than that of the previous six months after the coronation festivities.

Broad money is expected to increase by about 5% in the 2015/16 financial year. This is mainly due to an expected pickup in domestic credit and the foreign reserves. Currency in circulation is also expected to rise as a result of strong demand for the new currency that was launched in July 2015 and the expected stronger economic activity, partially offset by the recall of the old currency. Credit growth is expected to grow by more than 10% in the next six months, supported by the continuous improvements in business confidence and lending conditions and the high liquidity. Continued competition amongst banks, the high liquidity, and the ongoing lending activities of the Government’s Managed Funds will continue to support the current low lending rates.

Government receipt is expected to increase in the near term from budget support, issuance of government bonds and other new revenue streams. These are to finance the overall net borrowing requirement of $20.7 million for the 2015/16 fiscal year, as reflected in the Ministry of Finance and National Planning’s 2015/16 Budget Statement. The NRBT will closely monitor the implication of fiscal policy measures on the monetary policy objectives.

Given the above developments and outlook, the current accommodative Monetary Policy stance is maintained to continue to support macroeconomic stability and economic growth.