CBS maintains monetary policy at 2.0% for Q3 2023 |22 June 2023

Governor Abel speaking during the press conference (Photo: Louis Toussaint)

The board of the Central Bank of Seychelles has decided to maintain the monetary policy rate (MPR) at 2.0% for the third quarter of 2023.

The governor of the Central Bank, Caroline Abel, made the statement at a press conference yesterday morning at the ICCS.

According to her, economic activity on the domestic front has improved, primarily supported by the positive performance of the tourism industry and other sectors, such as construction and fisheries.

Tourism remained the main foreign exchange earner, despite a gradual decline in yield from the industry.

On the foreign exchange market, supply exceeded demand, which led to a strengthening of the domestic currency. The stronger Seychelles rupee contributed towards the decline in inflation observed since the start of the year. Furthermore, the growth in credit extended to the economy continued to provide the necessary momentum for the ongoing economic recovery.

“The loans that the commercial banks can take just in case they need liquidity with the central bank, it will remain at 3.5% and they have an excess of liquidity at the end of the day, they can dispose of it at the Central Bank and will receive a toll of 0.5%,” she said at the monthly press conference.

The interest rate on the Standing Deposit Facility (SDF) remains at 0.5% and the Standing Credit Facility (SCF) kept at 3.5%.

The amount of deposits that the law asks that the bank leaves with the Central Bank remains at 13%.

Ms Abel further went on to explain the elements that meant leaving the policy as it is. On the external front, since the country is one that relies heavily on importation of items for consumption, “the events that happen in the world is very important for Seychelles”.

The global growth projection was revised downwards when compared to the forecast at the beginning of 2023. This reflected the persistent higher inflation, which prompted tighter monetary policy actions by central banks, especially in the advanced economies. However, foreign inflation has been gradually declining, but in that effect, it remains above the respective targets of key central banks. Global oil and food prices are lower in comparison to 2022, although they remain elevated and are subject to several upside risks. Food prices such as meat has fallen by 18% but sugar has increased. Governor Abel has explained that this is down to a problem from the manufacturers in Brazil.

This could result in increased demand for foreign exchange, which if unmatched by a rise in supply, may lead to a weakening of the Seychelles rupee.

The central bank in America, England and in the European Central Bank have all increased the interest rate by 0.25%. In June, the Central Bank of America, the federal reserve, had maintained its position on the interest rates because it saw a reduction in the inflation rates. “The expectation is that England will also increase its interest rates by 0.25% but that is to be seen tomorrow.”

In light of the challenges faced, the world economy is expected to grow by 2.8 per cent in 2023, a downward revision from the forecasted 2.9 per cent at the start of the year. “This makes it that it is much more expensive to loan money with a bank to do investments. In other countries it also affects loans to build houses.”

Despite oil production cuts anticipated by the Organisation of the Petroleum Exporting Countries (OPEC), prices are expected to be stable albeit at elevated levels as a result of continued growth in supply, primarily by non-OPEC producers.

In addition, the war between Ukraine and Russia continue to be disruptive as in production or shipments of food exports from Russia or Ukraine as well as adverse weather conditions globally that may disrupt agricultural production.

Advanced economies continue to face challenges attributed to the tight monetary conditions as well as the intensified conflict between Russia and Ukraine.

In particular, recent indicators suggest that the Eurozone economies have slipped into a period of recession as of the first quarter of 2023.

In terms of developments in the foreign exchange market, both purchases and sales of foreign currency were higher relative to 2022, on account of the increase in domestic economic activity. Notwithstanding the rise in demand for foreign exchange, higher inflows, primarily from tourism activity, have contributed towards the strengthening of the Seychelles rupee in comparison to the same period last year. Despite this, Ms Abel has mentioned the fact that a weakening of the domestic currency against the US dollar has been observed.

The exchange rate outlook for 2023 is all dependent on several demand and supply factors. On the demand side, the rise in credit as well as elevated international commodity prices, may lead to a weaker Seychelles rupee. In regards to supply, such will be dependent on global demand for travel, mindful of the challenges being faced in key tourism source markets which may affect the performance of the domestic tourism sector.

On the domestic front, as at June 14, 2023, the total number of tourists was higher compared to the same period last year. The growth in visitor arrivals was sustained by the positive performance of the traditional western European markets as well as other regions. Over the same year, tourism earnings are estimated to be lower as a result of a decline in the average yield per visitor. CBS remains aware of the global challenges faced, despite the positive growth in visitors, it may adversely impact the local tourism industry and worsen the domestic economic outlook.

A gradual decrease in inflation has been observed in 2023 thus far, driven by the effects of the stronger domestic currency, coupled with the reduction in international food and energy prices. In May 2023, year-on-year inflation stood at negative 1.0% while the 12-month average rate of inflation was 1.8%. It is projected that inflationary pressures are expected to materialise in the medium term in view of the aforementioned demand-side factors and the exchange rate outlook.

Furthermore, a rise in aggregate demand and associated inflationary pressures can be expected if the expansion in domestic credit surpasses economic growth.

Consistent with its objectives, the Central Bank remains vigilant and stands ready to adjust its policies if necessary.

Sunny Esparon/ CBS Press Release