Fiji's central bank held its Overnight Policy Rate (OPR) steady at 0.5 percent, saying the bank's twin policy objectives of low inflation and adequate foreign reserves were currently stable so the accommodative policy stance remains appropriate.
The Reserve Bank of Fiji, which has maintained rates since December 2011, reiterated that it expects Fiji's economy to grow faster than the pre-budget estimate of 3.0 percent due to the government's expansionary stance this year. Fiji's economy is estimated to have expanded by 3.6 percent in 2013.
"Domestic economic conditions remain positive with improved performances envisaged for most key sectors of the economy this year," Robin Yarrow, the bank's acting chairman, said in a statement. He added that aggregate demand was continuing to strengthen due to a buoyant performance of consumption and investment activity, with surveys pointing to improving prospects in coming months.
Financial conditions also remain conducive for growth with ample liquidity leading to lower interest rates and annual commercial bank credit expanded by 17 percent in the year to January, a 7-year high.
Fiji's inflation rate eased to 2.3 percent in January while foreign reserves were at comfortable levels of around $1.763 billion as of Jan. 30, sufficient to cover 4.7 months of imports.
However, Acting Chairman Yarrow also noted that the Reserve Bank is closely monitoring the level of foreign reserves as demand for imports tend to rise much faster than exports when the economy grows, resulting in a widening of the trade deficit.
"While buoyant economic activity is beneficial to the economy, for a small open economy like Fiji with a very narrow export base, too much of it can create inflationary pressure and place pressure on our balance of payment position," Yarrow cautioned.
In its January economic review, the central bank said the trade deficit widened by 34.6 percent cumulative to October 2013 as imports rose by 10.8 percent while exports fell by 9.0 percent due to lower earnings from re-exports, gold, sugar, textiles, mineral water, coconut oil, timber, ginger and other domestic exports.
Nevertheless, Fiji's current account position is supported by healthy inflows of tourism earnings and personnel remittances, the bank said. Fiji's current account showed a surplus of 15.8 million Fijian dollars in the third quarter of 2013.
Fiji's government is targeting a net deficit of 1.9 percent in 2014, with asset sales expected to generate revenues of around $475.2 million. Excluding the asset sales, the underlying deficit jumps to 7.7 percent, according to the bank's January economic reviews.