Monetary policy measures muted by tight credit conditions [1]
Tuesday, November 9, 2010 - 16:49. Updated on Monday, September 9, 2013 - 18:40.
WHILE the domestic economy shows signs of recovery, the outlook looks weak, according to the National Reserve Bank of Tonga.
Noting that the world economy is recovering but it was not enough to reduce unemployment particularly in the United States, the bank's September 2010 Monetary Policy Statement released on October 29 stated that a dampening effect on remittances and tourism for Tonga would continue to be felt in the coming months.
Governor Siaosi Cocker Mafi said that the Reserve Bank would continue to closely monitor Tonga's economic and financial conditions.
She also reported on the state of the domestic economy in the past six months
Domestic economy
"The Reserve Bank's neutral monetary policy stance remained unchanged in the past six months," she stated.
"In the past six months, the level of foreign reserves continued to remain high above seven months of import cover. Consequently, liquidity in the banking system increased and remained at a high level.
"However, banks' credit growth to the private sector continued to contract reflecting weak domestic demand from low remittances.
Banks
"Despite the high level of liquidity in the banking system the desired outcome of the Reserve Bank's monetary policy measures were muted by the banks' continuing to tighten credit conditions and consolidate their balance sheets, focusing on recovering of non-performing loans," said the Governor.
Tonga's inflation increased to 5.00 per cent in the year to July 2010, with the effects of imported tobacco and alcohol excise taxes, and the increase in world oil prices, before easing to 2.9 percent in the year to September 2010.
While credit growth will continue to be subdued, economic activity is expected to pick up with increased construction and infrastructure activities supported by foreign aid.
Inflation is expected to rise as a result of the rebound in oil prices but would remain in single digits.
Governor Mafi stated that against this background, the neutral monetary policy stance would be maintained in the next six months.