Seychelles keeps loosened stance on modest inflation

     The Central Bank of Seychelles (CBS) will maintain a loosened monetary policy stance in the first quarter of 2020 citing a "modest" inflation outlook despite double-digit growth in average monthly earnings that boosts domestic demand and a rise in credit to the private sector.
     But the central bank said on Dec. 27 external inflationary pressures are moderate due to weak growth in global commodity prices as compared with 2018 and there was even a decline in some forecasted prices since the previous policy decision in September.
     In addition, the Seychelles rupee has remained stable against the U.S. dollar and the annual growth in tourism earnings has slowed from last year so CBS concluded inflationary pressures are not expected to reach levels that would threaten its objective of price stability.
      On Sept. 23 CBS loosened its policy stance for the fourth quarter of 2019 by cutting its monetary policy rate by 50 basis points to 5.0 percent to support economic activity given the expectations of "modest inflationary pressures in the short to medium term."
     Inflation in the Seychelles, a group of 115 islands in the western Indian Ocean, rose to 1.7 percent from 1.2 percent in October for a 12-month average of 1.9 percent.
     Tourism is a major contributor to the country's economy and as of Dec. 15 year-to-date visitor arrivals were up 5.6 percent and year-end tourism earnings are seen higher than in 2018.
     But growth in 2019 tourism is still seen below the forecast of 6.0 percent, with 2020 growth projected of 4.2 percent.
     A 5 percent government pay rise in April and a 10 percent rise in minimum wages has helped underpin demand and provisional date for November indicate private sector growth of 19 percent from November 2018, and double-digit private sector credit growth is forecast for 2020.
      Employment earnings have also grown an annual 15 percent in the second quarter of 2019 and if such growth levels were to be sustained, this could lead to additional demand pressures via the exchange rate and credit channels, and thus have inflationary effects, CBS said, adding:
     "Nevertheless, early indicators suggest slowdowns in the income growth and credit to households, thereby limiting the probability of inflationary effects in the short tun."
     In January CBS revised its monetary policy framework and began targeting interest rates, steering them through open market operations, from a quantitative target of reserve money as part of its move to modernize monetary policy.
     As part of this change, CBS launched a Monetary Policy Rate (MPR), setting it at 5.50 percent for the first quarter of 2019. MPR will also lie at the centre of an interest rate corridor.