Monetary Policy Statement: August 2026 PDF • 2,181 KB DOWNLOAD THE FULL STATEMENT
Over the past six months, Tonga’s macroeconomic conditions have remained broadly sound, although elevated inflation has emerged as the key/main macroeconomic concern.
Headline inflation exceeded the 5% reference rate in April 2026, rose to 7.9% in May 2026 before easing a month later to 7.1% and peaked at 9.3% in July 2026, reflecting heightened inflationary pressures associated with the extended US-Israel-Iran conflict that began in February 2026. Core inflation remained high at 9.1% in June 2026 and 9.0% in July 2026, reflecting the broader pass-through of accumulated inflation hikes in previous years to base costs, keeping the cost of living in Tonga relatively higher and elevating the risks of prolonged high inflation.
The Government’s inclusion of subsidies and cost of living measures in the FY2027 Budget will help cushion the impacts of higher prices on the public, and especially vulnerable households.
Gross foreign reserves remained above the IMF’s prescribed level of 7.5 months of import cover, providing adequate coverage for projected import demand in the near term. Though it has increased, it has leveled off at just below $1 billion, with the medium-term outlook uncertain and risks tilted to the downside, particularly if the ongoing US-Israel-Iran conflict continues. 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 that was effective 1 January 2026.
The financial system remains broadly stable with banks well-capitalized and with high liquidity. However, persistent excess liquidity weakens monetary control over the price of money and slows the adjustment of financial conditions to be aligned with underlying macroeconomic needs. The excess liquidity in the banking system remained high at around $76 million in June 2026 after the NRBT mopped up $271 million through its Notes issuance, compared to an excess of $300 million in August 2025 and $200 million in December 2025.
Credit growth remained resilient in June 2026 at 4.9%, with total bank lending reaching a record $634.5 million, on the back of increased lending to businesses and households. The continued expansion in credit reflects sustained lending activity and supports business confidence and the broader economic recovery. However, credit growth and investment appetite may dampen given the escalating uncertainties in global markets leading to higher business costs and weaker demand. Furthermore, non-performing loans remained elevated at 14.3%, well above NRBT’s 10% benchmark, despite a slight decline from a year earlier. This highlights the need for continued supervisory vigilance and strengthened credit risk management.
Interest rate movements remained modest, with the weighted average interest rate spread broadly stable at 6.1% in June 2026. Higher weighted lending rates, particularly for businesses and households, were offset by increases in weighted average deposit rates, resulting in limited movement in the overall spread.
Since the last Monetary Policy Statement (MPS), Tonga Statistics Department published its first estimate for Tonga’s real GDP growth for FY2025. It recorded a strong rebound of 4.4%. Nevertheless, growth is expected to moderate in the near to medium term, although recent improvements in sectoral performance and aggregate demand are expected to provide continued support.
While external monetary stability and financial stability have been maintained, persistent inflationary pressures, particularly from energy and food prices, alongside elevated core inflation, continue to pose risks to internal stability, fiscal stability through added pressure on the Government to increase subsidies addressing cost of living concerns, and macroeconomic stability.
Tonga’s headline inflation increased sharply from 2.0% in January 2026 to 9.3% in July 2026, a rise of 7.3 percentage points in just six months. This increase is significantly larger than among regional peers over the same period: Fiji rose from -2.5% to 5.7%, Samoa from -2.0% to 3.1%, Solomon Islands from 0.6% to 4.6% by June, while inflation in Australia remained at 3.8% and New Zealand increased only modestly from 3.1% to 4.1%1.
The comparatively rapid acceleration highlights Tonga’s greater vulnerability to imported and supply-side inflation, reflecting its high dependence on imported fuel, food and other essential goods, limited domestic production capacity, and exposure to external price and transport shocks. These pressures can pass through quickly into domestic prices and, if prolonged, risk becoming embedded in inflation expectations and broader price-setting behaviors.
Over the last 16 years, due to factors such as the weak monetary policy transmission to address inflation, a strong external balance, and a battered economy that was constantly rebuilding, monetary policy was geared towards supporting economic growth by allowing the accumulation of broad money and the non-sterilization of reserves. The zero-rate policy previously employed by the NRBT was helpful in providing opportunities for growth but in consequence, inflation was not prioritized. This was a trade-off befitting the time. However, Tonga has now become one of the top-three most expensive countries in the 14-member PICs due to persistently high inflation in the past 6-7 years since COVID.
As such, price stability must remain the NRBT’s first and foremost policy priority. Even where the initial shock is externally driven, persistently high inflation erodes household purchasing power of our people, raises business costs, weakens real incomes and can place pressure on our exchange rate Peg.
NRBT is continuing to prioritize building credibility of monetary policy, continuing issuing NRBT notes to enhance its ability to influence market rates and be able to better control inflation to be within NRBT’s reference rate.
