Monetary Policy shifting to neutral stance, with priority on Improving how policy decisions are transmitted to the economy, to be more effective
The Board of Directors of the National Reserve Bank of Tonga has approved the August 2025 Monetary Policy Statement (MPS). Over the past six months, downside risks have intensified, driven by international trade policy uncertainty, geopolitical tensions, and weakening global growth. NRBT is therefore adopting a neutral monetary policy stance over the next six months as part of efforts to modernise its monetary policy framework.
The stance will remain data-dependent, with scope to ease if growth weakens further or tighten if inflationary pressures rises again. In summary:
- Economic recovery has strengthened, with GDP growth exceeding 2% in 2025 and the near term, supported by construction, trade, tourism and agricultural sectors. Recovery is expected to continue in the near term, though medium-term growth remains below both the Pacific and global average highlighting our structural fragility.
- Headline inflation eased to 1.4% in June 2025, but core inflation is still high at 9.8%. Pressures are projected to decline, though risks remain.
- Foreign reserves remains comfortable at 10.6 months cover, but rising import payments, debt servicing, and capital outflows, particularly transfers offshore since 2023, pose emerging risks. Remittances are vulnerable to the new 1% US tax from 1st January 2026, creating additional downside risks.
- The financial system is broadly sound, with credit growth rising to 13.4% in 2025 and capital and liquidity positions adequate. However, non-performing loans remain elevated and access to finance for businesses continue to stagnate, limiting financial deepening.
Governor Moeaki stated that, “while short-term recovery is progressing, risks remains tilted to the downside. Monetary policy will move to neutral stance but responsive, guided by developments in growth, inflation, and external stability. This shift is critical for the remainder of 2025, 2026 and beyond. The key challenges ahead for NRBT is building the necessary market infrastructure to allow NRBT to play a more influential role in preventing inflation from drifting above the 5% reference rate, support financial deepening, and enhance the resilience of the financial system.”
The NRBT will implement the following actions over the next six months:
- Implement an Interest rate corridor by adopting a conventional mid-rate corridor framework with regular policy rate announcement to guide market rates.
- Issue NRBT notes to absorb excess liquidity, build infrastructure for interest rate channel.
- Maintaining the Statutory Reserve Deposit (SRD) at 15%.
- Review the Exchange Rate Policy Framework to ensure external stability.
- Enhance communication framework for greater transparency, and effective market signalling.
- Strengthen coordination and policy alignment between Monetary and Fiscal policies.
- Advance initiatives under National Financial Inclusion Strategy.
- 29 August 2025.
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