CBS discusses monetary policy in second quarterly meeting |06 July 2016

 The Central Bank of Seychelles has conducted its second quarterly monetary policy meeting for the year.

The board of directors were initially apprised of international developments and its potential impact on the domestic economy. This included short and long-term risks posed by the revised IMF global outlook, uncertainty of commodity price trends and the Brexit.

The board was then briefed on recent domestic economic developments through a review of latest statistics and domestic policy actions. Monetary data showed a relatively tight liquidity situation at banks with the latter often holding reserve levels below the industry’s precautionary balance. In addition, the stock of currency in circulation has remained above forecast.

Nevertheless, notwithstanding these developments, the June 2016 reserve money target is expected to be met, albeit by a finer margin than initially forecasted.

With regard to other key developments in the monetary sector, in May 2016, year-to-date growth rates of 7.2 per cent and 2.1 per cent were recorded in the money supply and private sector credit allocated by deposit-taking institutions respectively. While credit growth is forecasted to moderate relative to the

previous year, the sustainability of existing demand pressures within the banking system remain uncertain should deposit and lending rates continue to be sticky.

The general increase in demand within and outside the financial sector was mitigated by a robust level of visitor arrivals which translated into a double digit growths in the supply of foreign exchange.

Nonetheless, demand for foreign exchange recorded a growth of 17 per cent, which far exceeded supply (11 per cent) and thus contributed to a weakening of the rupee by 1.0 per cent and 3.4 per cent against the US dollar and euro respectively as at June 24, 2016.

Given the strong growth in demand for foreign exchange, the Bank maintained its suspension of purchases from the market for reserves accumulation purposes. Consequently, taking into consideration the country’s external obligation, particularly servicing of external debt, the level of international reserves

has declined from US $555 million at the end of March 2016 to US $535 million as at June 24, 2016.

While the country’s level of international reserves remained at a level above which the IMF has already considered as “desirable”, should the opportunity arise, the Bank will enhance the country’s level of resilience through further accumulation of reserves.

Inflation data showed that after a peak of 4.0 per cent in December 2015, the annualised inflation rate has trended downwards to 1.8 per cent in May 2016. The year-on-year inflation rate has recorded five consecutive months of negative growth. These movements have been underpinned by favourable international commodity prices, which had offset the effect of the depreciating domestic currency.

The board also discussed latest developments which could impact the current monetary policy stance. These included the announced fiscal policy impulses in the first quarter of the year, increased foreign exchange demand and credit growth outside deposit-taking institutions. Moreover, increased household

consumption and potentially, household credit demand are forecasted for the second half of the year.

These assumptions come following the second phase of the revision in Personal Income Tax in July 2016 and should monetary conditions – most notably savings rates – remain unchanged. External developments suggest a period of high uncertainty following the United Kingdom voting to exit the European Union in

addition to the US elections, all with the potential to cause supply side shocks in the short term.

In light of these developments, which underpin an uptick in inflationary conditions in the short to medium term, the board has unanimously decided to maintain an unchanged monetary policy stance for the third quarter of 2016.

Nevertheless, to cater for an above forecast growth of 15 per cent in foreign currency deposits and higher than anticipated level of currency with the public, the Bank shall undertake a structural adjustment in the level of reserve money to ensure consistency in policy and operational actions. This is reflected by the revisions in the third and fourth quarter targets. Operationally, the Bank’s intervention shall aim at minimising the level of free reserves that banks hold, which is unchanged from the Bank’s operations for the first half of the year.

The Bank remains vigilant and continues to actively monitor developments locally and internationally, while standing ready to adjust policies should the need arise.