Saturday, December 28, 2019

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.


     The Central Bank of Seychelles issued the following statement:
     

"Monetary Policy Rate is maintained at 5.0 per cent for Q1 2020

The Board of the Central Bank of Seychelles (CBS) has decided to maintain its loosened Monetary Policy stance for the first quarter of 2020, given the modest inflation outlook in the short to medium term.

On the external front, moderate inflationary pressures are expected on account of weak growth in global commodity prices relative to 2018 and noted declines in forecasted prices since the previous Monetary Policy decision. In addition, the Seychelles rupee (SCR) has remained relatively stable against the US dollar.

On the domestic front, the annual growth in tourism earnings have slowed down compared to the same period last year. In addition, published statistics on employee income, officially referred to as average gross monthly earnings, show a double-digit growth compared to 2018. This supports conditions for an increase in demand pressures, as reflected in the sustained rise in credit to the private sector. Despite these developments, inflationary pressures are not expected to reach levels that will threaten the Bank’s primary objective of promoting domestic price stability.

The decision to maintain the loosened monetary policy stance for the first quarter of 2020 was taken at the Monetary Policy meeting held on Monday December 23, 2019. Consistent with this decision, the CBS Board has kept the Monetary Policy Rate (MPR) at 5.0 per cent. The interest rate on the Standing Deposit Facility (SDF) and the Standing Credit Facility (SCF) will also remain unchanged at 2.0 per cent and 8.0 per cent, respectively.

Slowdown in external inflationary pressures
Global commodity prices, particularly food, is expected to rise albeit at a lower level compared to the previous quarter. With regards to oil prices, forecasts range from a slight rise to a slight decline in prices for 2020 relative to 2019, primarily due to weak global demand. Recent decisions to cut production levels by the Organisation of Petroleum Exporting Countries (OPEC) is expected to be offset by non-OPEC members increasing or maintaining current levels of production. However, developments in the international oil markets remain prone to supply shocks.

Slowdown in the tourism sector and revised earnings estimate
The tourism industry remains a key contributor to the country’s economic performance. As at December 15, 2019, the year-to-date growth in visitor arrivals stood at 5.6 per cent with end of year tourism earnings expected to be higher than in 2018. However, when considering that the end-November 2019 arrivals classified under “Holiday” increased by a moderate 2.6 per cent, coupled with an underperformance in select markets and a weaker euro globally, the annual increase in tourism earnings has slowed down. As such, the growth in tourism earnings for 2019 is expected to be below the previous forecast of 6.0 per cent, with a projected growth of 4.2 per cent in 2020.

Double-digit growth in credit to the private sector
Provisional statistics for November 2019 indicate a growth of 19 per cent in credit allocated to the private sector in comparison to November 2018. This was primarily due to increases in credit disbursed in the categories of ‘tourism’‘mortgages’ and ‘individuals & households.’ Growth in the latter two categories are linked to a period of sustained growth in employee income, which has improved access to credit by individuals and households. A moderation is expected in employee income growth, which would support conditions for a slowdown in the growth of household debt. However, double digit private sector credit growth is forecasted for 2020, in part due to sustained demand from other market segments. With regards to interest rates development, as at December 19, 2019, the average on the 7-day Deposit Auction Arrangement (DAA) was 5.14 per cent, while the yield on the 91-day Treasury Bills was 5.22 per cent, compared to 4.89 per cent at the end of the second quarter of 2019.

Recent Rise of income growth is forecasted to moderate
In comparison to the second quarter of 2018, employee income, also referred to as employment earnings, has grown by 15 per cent in the second quarter of 2019. If current growth levels are sustained, this could lead to additional demand pressures via the exchange rate and credit channels. Therefore, such growth levels will likely have inflationary effects and potentially, impact overall labour productivity. Nevertheless, early indicators suggest slowdowns in the income growth and credit to households, thereby limiting the probability of inflationary effects in the short run.

Modest increase in the inflation rate expected in the short run
Inflationary pressures have remained subdued for 2019. In November 2019, year-on-year headline inflation stood at 1.7 per cent, with the 12-month average rate at 1.9 per cent. Despite a recent slowdown in the growth of tourism earnings and potential second round effects of a rise in employee income, this is not expected to lead to excessive inflationary pressures in the short to medium run.

The MPR will remain at 5.0 per cent. As such, the interest rate on the SDF will be kept unchanged at 2.0 per cent, and that on the SCF will remain at 8.0 per cent. The Minimum Reserve Requirement (MRR) remains unchanged at 13 per cent of applicable deposit liabilities.

The CBS remains vigilant and stands ready to adjust its policies as needed to promote price stability."

    www.CentralBankNews.info




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