Since August 2025 Monetary Policy Statement, macroeconomic conditions continued to support a gradual recovery in economic activity. GDP growth strengthened to 2.5 percent in 2025 compared to 1.7 percent a year ago.

 

Headline inflation moderated to 3.1 percent in December 2025, remaining below the 5 percent reference rate. However, core inflation has persisted above 10 percent over the past two quarters, signaling underlying domestic cost pressures and risks emerging second round effects in the first half of 2026. This divergence points to structural inflationary drivers which, if not addressed, could pose risks to price stability and erode household purchasing power in the near term.

 

The financial system remains broadly stable with banks well-capitalized. However, persistent excess liquidity remains high at around $200 million, easing from $300 million in August 2025. The systemic liquidity imbalance weakens monetary control over the price of money, reduces market discipline and slows the adjustment of financial conditions to remain misaligned with underlying macroeconomic needs.

 

Gross foreign reserves remain at a stable level, providing adequate coverage for projected import demand in the near term. However, the medium-term outlook for reserves is tilted to the downside as domestic economic activity strengthens and import demand rises. Additional pressures may arise from potential remittance headwinds, including evolving access conditions to seasonal employment programs in Australia and New Zealand, and the remittance levy introduced by the United States effective 1 January 2026.

 

Credit growth moderated at 3.5 percent in 2025 while foreign reserves grew strongly by 8.2%, further reinforcing the system liquidity. Despite ample funds in the banking system, credit conditions reflect a deeper structural imbalance. Lending to the productive sectors such as agriculture, tourism, manufacturing and fisheries have stagnated over the years to around 20 percent compared to 39 in 2007.

 

The imbalance persists even though overall private sector credit stands at over 40 percent of GDP well below regional peers such as Fiji (around 120 percent of GDP) and Samoa (over 90 percent of GDP). Anecdotal evidence suggests that liquidity is not the binding constraint, rather structural factors and limited bankable investment opportunities are restricting effective credit absorption in the domestic productive sectors.

 

Interest rate movements remain modest, with the weighted average interest rate spread broadly unchanged at 6.1 percent in December 2025. However, non-performing loans remain elevated at 14.4 percent, above internal benchmarks necessitating continued supervisory vigilance and strengthened credit risk management.

 

Furthermore, rising geopolitical tensions and increasing protectionism in the global economy tilts risks to the global economy to the downside.

The new Cabinet appointed in December following the November 2025 General Election is expected to play a pivotal role in accelerating Tonga’s economic growth through decisive policy reforms, strengthened private-sector support, and improved investment confidence.

• The NRBT projects a real GDP growth of 2.5% for FY2025-26, lower than the global growth of 3.3%.
• Long term growth potential remains low at 1.2%. This aligns with a highly consumptive economy at around 120% of GDP while investment is relatively low at around 28% of GDP, as well as the high private remittances fueling a large proportion of household consumption.
• Opportunities exist to enhance private sector growth and increase investment in Tonga. Going forward, credit expansion is expected to rely on fiscal measures to support private sector development to take effect, underpinned by sound banking risk management.

The challenges facing the NRBT are not only technical but structural and therefore require a combination of calibrated monetary measures and broader structural policy reforms to effectively address the underlying imbalances in liquidity, market depth, and access to productive credit.

 

 

The Board of Directors has approved recommendations for NRBT to maintain its neutral monetary policy stance over the next six months, with the monetary policy rate at 2%. The stance will remain data-dependent, with room to tighten if inflationary pressures persist, as core inflation remains high.

 

The reactivation of the NRBT Notes issuance since September 2025 marks a credible transition from the passive liquidity absorption mechanisms towards a market-based monetary policy framework to help restore the effectiveness of the monetary policy framework as the foremost priority for NRBT.

 

The four banks’ increasing participation, together with their willingness to adjust their investment limits with reinforced measures from the Ministry of Finance are already establishing the new norm of monetary policy operations in Tonga. It is proposed that NRBT reinforces its commitment to advancing the “new normal” of its monetary operations, anchored on regular note issuance toward full excess liquidity absorption.

 

In pursuit of its mandate, the NRBT hereby implements the following policy measures over the next six months: