CBS maintains easing monetary policy stance
Posted on 07/09/2018
The Central Bank Board of Directors at its meeting on the 30 August 2018 approved the continuation of its loosening monetary policy stance for the year financial year (FY) 2018/19.
In making its decision, the Board took into account the expected recovery in economic growth following a decline in financial year FY 2017/18 while inflation is forecast to decline slightly over the year.
According to the International Monetary Fund’s (IMF) July 2018 World Economic Outlook (WEO) update, the global economy is estimated to have grown by 3.80 percent in FY2017/2018, up from 3.45 percent in FY2016/2017 due to strong growth momentum from the United States, European Union, Canada and Australia in the first six months to December 2017.
On the domestic front, real GDP is expected to grow by 1.0 percent in FY 2017/18, down from 2.5 percent in FY 2016/17 due largely to the full closure of the Yazaki Samoa plant in 2018 as well as reductions in output of sectors such as ‘Fishing’, ‘Financial Services’ and ‘Agriculture’. On the other hand, there were strong growths recorded for remittances and visitor receipts, which boosted gross foreign reserves to around $422.6 million, which is sufficient to buy 6.1 months of imports. Short term inflationary pressures continues to linger in the aftermath of Cyclone Gita in February 2018 as well as recent hikes in petroleum prices. This has seen headline inflation rise to 3.7 percent at end June 2018 given increases in both its domestic and imported components.
With manageable and the expected comfortable level of our international reserves in FY 2016/17, the Board felt that monetary policy should remain loose in order to support economic growth. Interest rates at end June 2016 are at low levels with the weighted average lending rate at 9.03 percent while average deposit rate is at 2.46 percent. The aim is to maintain these low levels going forward to encourage lending to private businesses in order to foster domestic investment and economic activity.
The outlook for real GDP in FY 2018/19 is a strong rebound of 3.0 percent to reflect several public and private sector projects and initiatives that will drive the recovery such as the preparations for Pacific Games 2019, construction of Vaisigano and Maliolio bridges, Airport extension and tarmac resealing, New Prison facilities, hotel developments and new churches in the pipeline. Headline inflation is forecasted to decline slightly to 3.4 percent by end June 2018 as both domestic and imported prices are expected to remain elevated in the next 12 months. On the external front, gross foreign reserves is forecasted to increase by $13.6 million in FY 2018/19 given expected improvements in exports of goods, visitor receipts and remittances, which will see international reserves remain at around 6.1 months of import cover.
With the expected increase in economic activity in FY 2018/19, the Board felt that the monetary policy should remain loosened in order to support the recovery at a time when Government is pursuing its fiscal consolidation. That said, the CBS will encourage the commercial banks to consolidate their lending activities, especially to saturated sectors and focus credit to well leveraged and financed sectors of the economy such as manufacturing, construction, trade and export oriented Small Medium Enterprises (SMEs) while minimising banking system re-financing activities. The CBS will also closely monitor inflation pressures in the coming months especially given possible downside risks such as the US-China trade tensions that could have direct and indirect impacts on our trade and imported inflation.