The outlook for the Tongan economy remains positive. Real Gross Domestic Product (GDP) is expected to record growth of 2.2% in 2014/15 supported by positive spillover effects from the declining global oil prices and low inflation. This is a downward revision from an estimate of 2.9% in the August 2014 Monetary Policy Statement, which largely reflects an unexpected contraction in the agricultural sector due to adverse weather conditions and delays to large construction projects scheduled for the year. Consumer prices recorded the first deflation rate since May 2013 of -1.1% over the 12 months to February 2015.

The global economy grew 3.3% in 2013, slightly higher than the estimate published in the March Monetary Policy Statement. The NRBT estimated a much stronger real GDP growth, of 2.5% in 2013-14, an upward revision from the March MPS estimate of 2.0% growth. The upward revision reflects a much stronger than expected second half to the year owing to availability of data for the agricultural and tourism sectors which were offset slightly by a softer growth in the construction sector.

World output grew by 3.0 per cent in calendar year 2013, slightly faster than the expectation published in the September 2013 Monetary Policy Statement. Growth strengthened in the second half, particularly in the advanced economies. For Tonga, the official national accounts data for financial year 2013 are still unavailable. The NRBT estimates that real economic growth slowed to 0.2 per cent, owing mostly to a slowdown in construction activity. The estimate is the same as in the NRBT’s September 2013 Monetary Policy Statement, although the figures for some of the individual sectors have changed. Activity appears to have lifted a little in the first half of financial year 2014.

Most central banks overseas maintained expansionary monetary policies in the first half of this calendar year, because inflation pressures were moderate. World Gross Domestic Product (GDP) growth was also slower than anticipated in the last Monetary Policy Statement. The International Monetary Fund (IMF) has since lowered its growth figures for calendar 2013, now expecting 2.9 per cent, whereas previously it was expecting 3.3 per cent.

The Reserve Bank’s monetary policy remained accommodative over the past six months. The Bank’s outlook was for annual inflation to remain below 6 per cent and for foreign reserves to remain above four months of imports. Gross official foreign reserves increased over the past six months, to $258 million. The level of foreign reserves was equivalent to 9.1 months of imports, well in excess of the NRBT benchmark of 3 to 4 months of imports. Consumer price inflation rose to 1.1 per cent over the year ended February 2013. The NRBT achieved its primary objectives of maintaining an adequate level of foreign reserves and promoting low and stable inflation.

The Reserve Bank’s monetary policy remained accommodative over the past six months. The Bank’s outlook was for inflation to remain below 6 per cent and for foreign reserves to remain above three months of imports. Gross Official Foreign Reserves reached a record high of $253 million in August, or 8.2 months of imports. Receipt of aid from Tonga’s development partners underpinned this increase. Tongan consumer prices fell by 0.6 per cent over the year ended August 2012, a softer outcome than that recorded in the last Monetary Policy Statement. As such, the Reserve Bank’s primary objectives of maintaining an adequate level of foreign reserves and promoting low and stable inflation were achieved.

The current accommodative monetary policy stance will be maintained in the next six months. The Reserve Bank will continue to target maintaining the country’s foreign reserves position at an adequate level, and promoting low inflation, mindful of the risks to the outlook on the global economic and financial situation and their impact on the domestic economy. The Reserve Bank will continue to closely monitor the country’s economic and financial conditions in order to promote a sound and efficient financial system.

The global economy has slowed since the last review and recovery has become much more uncertain. Global activity has weakened, confidence has fallen sharply and financial risks have increased. The International Monetary Fund (IMF) in its World Economic Outlook September 2011 has estimated that global economic growth will moderate to around 4 percent in 2011 from 5.1 percent in 2010. In the United States, economic growth is slowing, public debt continues to rise and unemployment remains high.

The recovery in the global economy continues to advance, however remains uneven. In many advanced economies, growth remains subdued and unemployment rates are still very high. In contrast, activity in many emerging economies remains buoyant, inflationary pressures are rising, and there are signs of overheating driven in part by strong capital inflows. The International Monetary Fund (IMF) has estimated that the world economy will grow by 4.4 percent in 2011, a fall from 5 percent growth in 2010. In the United States (US), the pace of recovery has picked up on the back of easing financial conditions and increased private demand.

The National Reserve Bank of Tonga (NRBT) continues to focus on its monetary policy twin objectives of maintaining an adequate level of foreign reserves and promoting price stability. In the past six months, the level of foreign reserves continued to remain well above 4 months of import cover supported by large inflows, credit constraints on domestic demand and a modest pick up in remittances. Consequently, liquidity in the banking system continued to increase and remained at a high level.