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Archive -Seychelles

CBS makes public its monetary policy discussions and decisions |01 October 2014

As part of its forward looking approach to policy formulation, the board of the Central Bank of Seychelles has decided to communicate its discussions and decision to the public.  

“This is an important step in shaping the expectations of market participants,” says a press release from the bank.  
 
Monetary policy discussions are held every quarter and so far this year, the board has held three such meetings.

At its meeting of September 29, 2014, the board reviewed international developments which have particular implications for the Seychelles economy. Debates centred on the economic performance and outlook of the global economy, the US as the world’s biggest economy, but more importantly, the Eurozone which is the country’s main trading partner, both in terms of the tourism industry and exports.

The board reviewed trends in the international commodity markets namely food and oil prices which showed an overall decline.  Generally, both food and oil prices fell in August 2014.

On the domestic front, the latest Q2, 2014 data releases by the National Bureau of Statistics (NBS) were reviewed.  The board was apprised of the backdrop of the results and evaluated the prospects for the rest of the year.  

Data on tourism performance was of particular interest in view that the end of August 2014 figures showed continued decline in arrivals on a year to date basis by 1.1 per cent relative to the same period in 2013.
 
The data on trade, particularly the increase in imports, which is also supported by the rise in private sector credit, has led to a higher demand for foreign exchange compared to same time last year.  

Year-on-year, credit to the private sector has grown by 16 per cent while the demand for foreign currency increased by 13 per cent. Given that the rise in demand for hard currency has so far this year outweighed growth in supply, the domestic currency has maintained an overall depreciating trend during the third quarter of the year.  

Moreover, the financial system has not been able to effectively meet all demand for foreign exchange in a timely manner, which has resulted in the emergence of a backlog.  This is primarily due to the fact that the exchange rate was not adjusting at a pace that reflected the rising demand pressure. To note, the bank wants to reassure the market that the recent movements in the exchange rate is in line with economic fundamentals at this point.

Nonetheless, this trend is of particular concern for the CBS in light of its potential future impact on inflation.  Based on the Consumer Price Index (CPI), the inflationary outcome for the third quarter of 2014 has been relatively benign.  However, if the trend in the foreign exchange market continues, there is a real threat to inflation in the coming months given the significant pass-through of the exchange rate to domestic prices.  This is further supported by the second release of the Producer Price Index Manufacturing (PPIM) which measures inflation from the perspective of the producers in the manufacturing industry and the series shows rising cost pressures.

Having examined all the information presented and discussing the upsides as well as potential risks, particularly the potentially adverse impacts of developments in the foreign exchange market on the CBS’s prime objective of price stability, the board unanimously approved for further tightening of its monetary policy stance for the fourth quarter of this year in order to counter the risk of inflationary pressures and to have a further dampening in domestic demand.  

The policy decision is based on the assumption of an overall relatively stable external environment.  

Nonetheless, the CBS remains vigilant and monitors closely developments locally as well as internationally and stands ready to further adjust its policies should the need arise.


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