Central Bank monetary policy presentation and foreign exchange market developments |01 July 2021

Governor Abel during the press conference yesterday (Photo: Jude Morel)

New structural shift in interest rate corridor

The Central Bank of Seychelles will implement a structural shift in the interest rate corridor and sets the Monetary Policy Rate at 2.0 percent for the third quarter of 2021, Governor Caroline Abel has announced.

Ms Abel made the announcement yesterday during the Central Bank of Seychelles (CBS) weekly monetary policy presentation and foreign exchange market developments.

She explained that the CBS board has decided to maintain an accommodative Monetary Policy stance for the third quarter of year, and mindful of the prolonged challenges that threaten economic recovery, this stance is aimed to support domestic economic activity.

She added that in order to ensure that interest rates in the market are aligned with prevailing macro-economic fundamentals, the board also approved a structural shift in the interest rate corridor.

Consequently, the Monetary Policy Rate (MPR) will be at 2.0 percent while the interest rate on the Standing Deposit Facility (SDF) and Standing Credit Facility (SCF) will stand at 0.5 percent and 3.5 percent, respectively.

In line with this realignment of the corridor, a general reduction in interest rates is expected in the medium term in the domestic market, while the effects of the Covid-19 pandemic are still being felt across various sectors of the domestic economy and in general, and economic activity remains weak.

Ms Abel further explained that the relaxation of entry requirements for visitors in late March led to an increase in tourist arrivals and tourism earnings but such performance remained lower than the pre-Covid-19 levels.

In terms of developments in the labour market, although latest statistics showed a reduction in the number of redundancies and jobseekers, employment conditions remained challenging, while one of the main impediments remains the issue of skills-mismatch.

She added that as businesses continue to face financial difficulties from the disruptive impacts of the pandemic, production statistics recorded negative performance.

Moreover, in April 2021, credit to the private sector declined in year-on-year terms.

With the vaccination programme going according to plan in many countries, travel restrictions are being eased abroad, therefore, tourism is expected to pick up gradually towards the end of the year.

She however noted that this is subject to uncertainties such as the emergence of new variants and the effectiveness of existing vaccines to the new strains of the virus.

Following an increase in the supply of foreign exchange and relatively lower demand, Ms Abel said there was a sharp appreciation of the Seychelles Rupee at the beginning of the second quarter.

The latest statistics show a pick-up in demand for foreign exchange in comparison to the previous quarter.

Stability in the exchange rate has been observed, although it remains conditional on the movements in the aggregate level of supply and demand, and therefore, the underlying factors that influence these indicators.

On the external front, Ms Abel explained that commodity prices have been on the rise as global demand picks up following progress made in terms of vaccination and the easing of restrictions ahead of summer.

She also explained that the supply of food has been heavily impacted by disruptions in production and transportation, among other supply-side constraints, which have led to an increase in prices over the last six months, while commodity prices are expected to maintain an upward trend at least in the quarter ahead.

Moreover, the decision of the Organisation of the Petroleum Exporting Countries (OPEC) to cut back production is expected to result in higher oil prices.

Notwithstanding these developments, economic conditions remain weak in general, which continue to pose financial stability concerns domestically.

Given the structure of the local economy, its recovery is dependent on external developments such as a revival of the global travel industry and the general response to the vaccination programmes, particularly in key tourism markets.

Domestic factors such as fiscal and debt sustainability, policy alignments and improved labour market conditions are also critical elements.

Despite the uncertainties arising from the current environment, there are signs of a fragile recovery as some business activity gather momentum.

In its deliberations, the Board also discussed the need to realign the existing interest rate structure in the economy such that these are in line with the prevailing macro-economic fundamentals.

Consistently, as part of the monetary policy decision, the Board approved a structural shift in the interest rate corridor.

The decision to set the MPR at 2.0 percent was taken by the Board at its Monetary Policy Meetings held on June 21 and 28.

Consequently, the interest rates on the SDF and SCF will stand at 0.5 percent and 3.5 percent, respectively.

The Minimum Reserve Requirement (MRR) remains unchanged at 13 per cent of applicable deposit liabilities, but as approved by the Board on June 22, 2020, it may be reduced to 10 per cent on rupee deposits should liquidity conditions warrant such an adjustment.

In line with its objectives, the CBS remains vigilant and stands ready to adjust its policies if necessary.

CBS Press Release / Roland Duval