Follow us on:

Facebook Twitter LinkedIn YouTube

Domestic

CBS keeps monetary policy stance unchanged for third quarter of 2019 |26 June 2019

The board of the Central Bank of Seychelles (CBS) has decided to maintain the current tight monetary policy stance for the third quarter of 2019, in light of risks to domestic price stability in the short to medium term.

Although on average global commodity prices, particularly oil prices, have remained lower so far in 2019, compared to 2018, there is a higher likelihood of inflationary pressures stemming from external sources. On the domestic front, factors with the potential to cause inflation include increased aggregate demand, sustained growth in credit to the private sector, as well as the spill-over effects associated with the implementation of some fiscal measures.

The decision to maintain the current monetary policy stance for the third quarter of 2019 was taken at the Monetary Policy meeting held on June 24, 2019, during which the CBS board also decided to keep the Monetary Policy Rate (MPR) at 5.5 per cent. With an unchanged MPR, the interest rate on the Standing Deposit Facility (SDF) and the Standing Credit Facility (SCF) remain at 2.5 per cent and 8.5 per cent, respectively.

 

Increased risk of a pick-up in external inflationary pressures

Global commodity prices, particularly oil, had been forecasted by some analysts to be lower in 2019, relative to 2018, amid rising uncertainties around global oil demand growth. However, recent international events have increased inflationary risks. This is mainly linked to the anticipated upward pressures on oil price associated with tensions between the US and Iran, while food prices have generally recorded a steady increase since the beginning of this year.

 

Positive performance in the tourism sector with higher forecasted tourism earnings

The tourism industry remains a key contributor to the country’s economic performance. As at June 16, the year-to-date growth in visitor arrivals stood at 9.0 per cent. Tourism earnings are also projected to be higher in 2019 compared to 2018, by around 6.0 per cent in US dollar terms. This is largely due to the aforementioned positive growth in visitor arrivals, partly as a result of increased flight frequency and connectivity.

 

Slowdown in money supply growth but double-digit growth in credit to the private sector

On year-on-year terms, provisional figures show that the money supply grew by 8.1 per cent in May 2019 compared to 15 per cent in May 2018. Over the same period, credit to the private sector grew by 19 per cent, to its highest level since April 2018. These were primarily loans in the categories of ‘mortgages’, ‘private households’ and ‘wholesale & retail trade’. As at June 16, the average interest rates on the 7-day Deposit Auction Arrangement (DAA) was 5.52 per cent, while the average return on the 91-day Treasury bills was 5.50 per cent, compared to 5.38 per cent at the end of the first quarter of 2019.

 

Subdued inflation outcome with increasing risks of a pick-up forecasted in the short to medium term

Inflationary pressures have remained subdued thus far in 2019. In May 2019, year-on-year headline inflation stood at 2.1 per cent, and the 12-month average rate stood at 2.8 per cent. In the short-term, the main factors that are expected to have an impact on inflation include increased aggregate demand supported by higher disposable income, sustained consumption-driven demand for credit, as well as the potential inflationary impulses associated with the implementation of some fiscal policies.

 

Maintain the prevailing monetary policy stance in view of persisting risks to domestic price stability

While growth in economic activity generally remains positive, the CBS board also considered key developments in the domestic economy, which could potentially pose a threat to domestic price stability. In addition to the sustained growth in credit allocated to the private sector, higher disposable income, some announced fiscal measures and their associated effects, were also considered. The board decided to maintain the current monetary policy stance for the third quarter of 2019 to ensure domestic price stability.

The MPR will remain unchanged at 5.5 per cent. As such, the interest rate on the SDF will be maintained at 2.5 per cent, and that on the SCF will also be kept at 8.5 per cent. The Minimum Reserve Requirement (MRR) remains unchanged at 13 per cent of applicable deposit liabilities.

The CBS remains vigilant and stands ready to adjust its policies as needed to promote price stability.

 

Contributed

More news