Monetary Policy Rate remains unchanged at 2.0% for Q1 2024 |29 December 2023
Journalists at yesterday's press conference on the country's Monetary Policy Rate
The Board of the Central Bank of Seychelles (CBS) has decided to maintain an accommodative monetary policy stance, keeping the Monetary Policy Rate (MPR) at 2.0% for the first quarter of 2024. A review of the fourth quarter of the year showed that the tourism industry continued to support domestic economic activity. This was announced by the Governor of Central Bank, Caroline Abel in a press conference yesterday.
Thus far, the supply of foreign exchange has been exceeding demand, contributing to the appreciation of the Seychelles rupee in year-to-date terms. Consequently, the stronger local currency, coupled with the decline in international commodity prices, underpinned the deflationary trend in the average prices of goods and services observed since May 2023. On the external front, inflationary pressures have eased, partly as a result of the successive interest rate hikes implemented by central banks globally. Nonetheless, the resultant tight monetary conditions impacted economic activity in 2023, and global growth for 2024 is anticipated to slow down further. Domestically, inflation is expected to increase in the upcoming quarters due to the potential risks associated with higher international commodity prices. In regard to the foreign exchange market, the domestic currency may weaken if demand for foreign exchange exceeds supply. In other developments, the recent explosion that impacted several businesses at the Providence Industrial Estate and households within the surrounding areas, as well as heavy rainfall that affected residents in the north of Mahé, have brought forth many challenges and uncertainties related to the reconstruction of damaged buildings and resumption of activities. Considering the subdued global outlook, as well as the vulnerability of the local economy, CBS is cognisant of the need to support the domestic economy in these challenging times. As such, the MPR will remain unchanged at 2.0%, whilst the interest rate on the Standing Deposit Facility (SDF) and Standing Credit Facility (SCF) will be maintained at 0.5% and 3.5%, respectively.
The successive hikes in interest rates by central banks globally contributed to the easing of foreign inflation. Amongst the advanced economies, inflationary pressures subsided faster in the United States when compared to the other regions. The Federal Reserve and European Central Bank are expected to cut interest rates in the coming year. Nonetheless, the prevailing tight monetary conditions and the escalation in geopolitical tensions are anticipated to negatively affect economic growth across many economies. According to the International Monetary Fund, global growth is projected to slow down to 2.9 per cent in 2024 from 3.0 per cent in 2023.
International commodity prices declined in 2023 compared to the previous year, mainly due to lower economic activity. In light of the production cuts announced by the Organisation of the Petroleum Exporting Countries and partner countries (OPEC+) for the first quarter of 2024, global oil prices are expected to increase. Additionally, the possible escalation of the conflict in Gaza between Israel and Hamas, as well as the Russia-Ukraine conflict may pose upward pressure on oil prices. Global food prices are anticipated to increase on account of supply reductions attributed to export restrictions of key commodities by various countries, the cessation of the Black Sea Grain Initiative in July 2023, climate-related phenomena such as El Niño and potential disruptions in view of the growing number of attacks on cargo ships in the Red Sea.
On the domestic front, as of December 17, 2023, Seychelles welcomed a total of 332,886 tourists, which was an increase of 5.1 per cent compared to the same period in 2022. This growth primarily stemmed from a rise in visitors from traditional western European markets, particularly Germany, Russia and Italy. Over the period January to November 2023, estimated tourism earnings expanded by 1.3 per cent compared to the previous year. CBS recognises that the outlook for the tourism sector is subject to downside risks associated with lower global economic growth and the geopolitical tensions.
Transactions in the foreign exchange market increased in line with positive economic activity. As at December 26, 2023, the total volume of purchases and sales was higher than in 2022. In terms of exchange rate movements, the domestic currency strengthened in year-to-date terms relative to 2022. However, the seasonal pick-up in demand during the latter half of 2023 resulted in a weakening of the Seychelles rupee against the three major currencies. Looking ahead, demand for foreign exchange is expected to increase on account of the forecasted rise in international commodity prices.
With regard to inflation, official statistics show a decline in the average prices of goods and services in year-on-year terms since May 2023. This was attributed to the stronger domestic currency in annual average terms, the reduction in global food and energy prices, as well as lower freight costs. In November 2023, the year-on-year inflation rate was negative 2.6% whilst the 12-month average inflation rate was negative 0.6%. The deflationary trend is anticipated to be shortlived, given the potential upside risks linked to global commodity prices.
The explosion impacted many businesses at the Providence Industrial Estate and households in the nearby areas, whilst the adverse weather conditions affected several residents in the north of Mahé. These events have brought forth many challenges and uncertainties related to the reconstruction efforts and resumption of business operations. The full resumption of services will depend on several factors, such as the timing and extent of insurance claim payouts, as well as the availability of construction materials. In that respect, there is a concerted effort from the various local stakeholders, including the government, as well as bilateral partners to assist in that endeavour. The fiscal support being extended to those affected is expected to increase government expenditure. Conversely, lower fiscal revenue is anticipated in light of the reduced economic activity in the first half of 2024. In addition, the banking sector is offering a moratorium of three months on debt repayments for affected businesses. As for the individuals impacted by the disasters, the moratorium period is being determined on a case-by-case basis.
Considering the aforementioned developments and outlook, the CBS Board maintained an accommodative stance at its Monetary Policy Meeting held on December 27, 2023. The MPR remains at 2.0%, with the interest rates on the SDF and SCF kept at 0.5% and 3.5%, respectively.
The Minimum Reserve Requirement (MRR) remains unchanged at 13% of applicable deposit liabilities, but as approved by the Board, it may be reduced to 12% on rupee-denominated deposits to ensure sufficient liquidity in the system, should it be required. This will complement the other measures being implemented at the national level to support those affected by the disasters in December.
To conclude, Governor Abel also noted that “the world is unpredictable and we have to have a faster and coordinated response for the country. The recent events also push for a more resilient financial sector and the financial institutions should have the ability to withstand and manage shocks. We also have to assess the climate risks and adapt our measures. We have also seen the importance of have an insurance to protect us against unforeseen circumstances and also to have the right type of insurance at the right value.” Governor Abel also pointed out the importance of savings so that we do not find ourself in troubled times. Consistent with its objectives, the Central Bank remains vigilant and stands ready to adjust its policies if necessary.
Compiled by Vidya Gappy/ CBS Press Release