Monetary policy rate remains at 3% for Q4 2020 |01 October 2020
The Board of the Central Bank of Seychelles (CBS) has decided to maintain the Monetary Policy Rate (MPR) at 3% for the fourth quarter of the year.
Cognisant of the need to support the domestic economy, the broader set of policy measures implemented by CBS to address challenges of the Covid-19 pandemic is expected to assume a greater role in minimising economic loss.
Despite the opening of the international airport, economic activity remained subdued due to a sluggish recovery of tourism in terms of both tourist arrivals and tourism earnings.
Additionally, inflationary pressures are forecasted to increase in the short to medium term following the depreciation of the domestic currency as a result of limited supply of foreign exchange compared to demand.
As such, consistent with the unchanged MPR, the interest rate on the Standing Deposit Facility (SDF) and Standing Credit Facility (SCF) will remain at 1% and 6%, respectively.
On the domestic front, the pandemic is anticipated to reduce income generated in the services sector, constrain private sector revenue and necessitate adjustments in the labour market, among many other effects.
Given that the performance of the tourism sector is expected to remain significantly below its 2019 level in the near term, the main driving forces of the economy are expected to stem from the fisheries and manufacturing sectors. However, revenue generated in these sectors will be insufficient to compensate for the loss in tourism revenue. Consequently, economic activity is projected to contract by double-digits in 2020.
Taking into account relatively strong demand for foreign exchange and limited inflows observed since the second quarter, the domestic currency has depreciated against all major currencies, thus requiring CBS to support the market through the use of international reserves. Such developments are expected to persist for the rest of the year.
The upward adjustment in the exchange rate is forecasted to increase the cost of imports and lead to additional inflationary pressures in the upcoming months. Given the uncertainty surrounding the recovery of the tourism sector, a change in social behaviour is required to help reduce domestic demand for foreign currency and thus, contribute towards stability in exchange rates and prices.
Government support to the private sector to alleviate operational challenges and sustain economic activities through the use of expansionary measures may add to inflationary pressures. Due to limited fiscal revenue, these additional measures are being financed through borrowing from domestic and external sources which increases the debt burden of the country. In light of the difficult economic environment, a sustainable fiscal strategy taking into account the country’s ability to honour its debt obligations would need to be adopted going forward.
Relative to the second quarter, which was characterised by national lockdowns across most parts of the world, international commodity prices trended upwards in the third quarter as countries sought to revive economic growth. Oil and food prices are anticipated to rise moderately in the latter half of 2020, although they are not expected to surpass 2019 levels. The outlook for international prices remains highly sensitive to the rebound of global economic activity given restrictions that may be imposed to contain the pandemic.
The revival of the domestic economy is highly dependent on developments in the global travel industry, with most indicators pointing to a remarkable slowdown in 2020. The adjustment in the local economy is anticipated to be challenging given the unprecedented uncertainty surrounding the economic recovery. Therefore, economic activity is projected to decline, at least in the short term.
The decision to maintain the MPR at 3% was taken at the Monetary Policy meeting held on September 30, 2020. The interest rate on the SDF and SCF will be kept at 1% and 6%, respectively. The Minimum Reserve Requirement (MRR) remains unchanged at 13 per cent of applicable deposit liabilities. However, as approved by the Board on June 22, 2020, the MRR may be reduced to 10 per cent should liquidity conditions warrant the adjustment.
The Central Bank remains vigilant and stands ready to adjust its policies as needed to promote price stability.
Press release from CBS