• The global economy has weakened due to the US tariffs and escalating policy uncertainties, slowing down the global disinflation and stressing financial markets;
  • Tonga is expected to record growths of above 2% in the near to medium term, continuing to lag behind the world and the region reflecting fragile recovery;
  • Headline inflation has dropped below the 5% reference rate while core inflation remains high above 5%, a cause for concern as headline inflation may rebound if food and energy prices take a turn due to global movements;
  • Foreign reserves is comfortable but largely dependent on foreign aid and remittances. Declines in growth of our trading partners may have significant impact on balance of payments should remittances and official grants decline. The  additional 1% tax on remittances by the US also pose a threat to the level of remittances inflow to the country;
  • The financial system remains sound, annual credit growth was healthy at 13.4 percent in line with the economic recovery. At the same time, indebtedness issues are on the rise and non-performing loans are still a concern at 14.1% of
    total loans;
  • Interest rate spread narrowed by 20.4 basis points to 6.1 percent due to a decline in weighted average lending rate from 7.57 percent to 7.55 percent, while weighted average deposit rate increased from 1.44 percent to 1.49 percent.

Given the above, the NRBT Board of Directors has approved that monetary policy moves towards a neutral stance, and to modernise the monetary policy framework. This would ensure the NRBT can be in a stronger position to influence the interest rate channel more effectively when it comes to addressing inflation while at the same time continuing to support economic recovery and fulfill the Bank’s multi-faceted mandates.

Based on the latest economic developments and outlook, the NRBT will move towards a neutral monetary policy stance over the next six months, with the real policy rate projected to be around zero, up from negative territory earlier in the year. The stance will remain data-dependent, with room to ease if growth falters or tighten if inflationary pressures re-emerge. The NRBT remains committed to maintaining price stability, external stability, and financial stability and will continue to gradually modernize its monetary policy framework and operations to achieve its objectives.

In pursuit of its mandate, the NRBT hereby implements the following measures:

  1. New Monetary Policy Interest Rate Corridor. The NRBT announces that it will now adopt a conventional mid-corridor framework where its policy rate will be the mid-rate of the interest rate corridor (IRC) instead of the floor rate framework it employed in the past.
  2. Policy Rate announcements by the NRBT will indicate where the policy rate will be and where it is likely to be heading. The standing facilities at the NRBT will be at +/- 200 basis points or 2 percentage points from the Policy Rate. As such the Marginal Deposit Facility (MDF) or interest on the ESA will be the policy rate minus (-) 200 basis points (bps). The Marginal Lending Facility (MLF) or overnight repo transactions will be conducted at policy rate plus (+) 200 bps.
  3. As such, the Interest Rate Corridor (IRC) will be as follows:
    1. Policy Rate: 2% (mid-rate)
    2. Marginal Deposit Facility (MDF): 0% (2% - 2% = 0%)
    3. Marginal Lending Facility (MLS): 4% (2% + 2% = 4%)
  4. Strengthen the monetary policy transmission mechanism, gradually.
    1. Reactivate interbank lending market and enhance liquidity management by:
      1. Issuance of NRBT Notes at fixed rate full allotment to commercial banks at the policy rate (2%).
      2. Continuing active consultations with the banks and engage with MOF to enhance NRBT’s liquidity management and forecasting framework.
      3. Maintaining the Statutory Reserve Deposit at 15 percent.
  5. Review the Exchange Rate Policy Framework.
  6. Strengthen the Communication Framework for improved transparency and outreach. Strengthen the timeliness, clarity, and accessibility of monetary policy communication to policymakers, market participants, and the public. Measures will include the regular publication of monetary policy statements and supporting reports outlining the rationale for policy decisions. These steps aim to enhance policy predictability, anchor expectations, and reinforce the credibility of the
    monetary policy framework.
  7. Enhance coordination between Monetary Policy and Sustainable Fiscal Policy: Strengthen collaboration with fiscal policy on shared national objectives and strategies, and advance critical structural reforms to improve Tonga’s long-term growth potential, optimizing limited resources for timely and efficient policy execution for maximum impact.
  8. Address Financial Deepening Stagnation through rolling out initiatives under the National Financial Inclusion Strategy. This includes the implementation of a FinTech Regulatory Sandbox Framework for greater Digital Financial Services, passing of a financial consumer protection policy, and project implementations to support micro small and medium enterprises financing and inclusive green financing.
  9. The NRBT also acknowledges that there are factors outside of its control that will also have an impact on the conduct of monetary policy. Nonetheless, effort is being made to collaborate with all relevant stakeholders for the achievement of its monetary policy objectives.

The NRBT will continue to push through with the modernisation of its monetary policy tools to better support its monetary policy initiatives to stimulate interbank trading, with a view to align short-term interest rate with the NRBT policy rate, enhance the transmission of monetary policy to commercial banks’ lending and deposit conditions, and ultimately overall macroeconomic conditions, in particular inflation. The modernisation of monetary policy tools to build the market infrastructure will also support financial deepening and resilience of the financial system. These measures will enable the NRBT to play a more active role in promoting price stability and macroeconomic growth, supplementing the Government’s fiscal expansion.