Seychelles cuts rate 4th time as rate corridor lowered

     The central bank of Seychelles, the archipelago in the Indian Ocean, shifted its interest rate corridor downwards to lower market interest rates and support the ailing economy, with the result the monetary policy rate was cut for the fourth time since September 2019.
     The Central Bank of Seychelles (CBS) lowered its key rate by another 100 basis points to 2.0 percent.

     The central bank has now cut its policy rate four times and by a total of 3.50 percentage points since September 2019, including two rate cuts last year by 2.0 percentage points.
     "In order to ensure interest rates in the market are aligned with prevailing macroeconomic fundamentals, the Board also approved a structural shift in the interest rate corridor," CBS said, adding it expects the realignment to lead to a general reduction in domestic market interest rates.

    The Standing Deposit Facility (SDF) rate was lowered by 50 basis points to 0.5 percent while the Standing Credit Facility (SCF) rate was lowered by 250 points to 3.50 percent.

     The central bank's minimum reserve requirement remains at 13.0 percent of banks' rupee reposits but the bank said its board on June 22 approved lowering this to 10.0 percent "should liquidity conditions warrant such an adjustment."

     The Republic of Seychelles is made up of 115 islands off the east coast of Africa and relies heavily on tourism, which has been devastated by the COVID-19 pandemic.

     "The effects of the COVID-19 pandemic ares still being felt across various sectors of the domestic economy and in general, economic activity remains weak," the central bank said.

     The rate cut comes the day after a joint report by UNCTAD (United Nations Conference on Trade and Development) and UNWTO (UN World Tourism Organization) said the pandemic will cost the global economy more than $4 trillion in 2020 and 2021, and the tourism crises is far from over.

     The report noted travel restrictions are still in place in many parts of the world and there might not be a return to pre-pandemic levels of international tourists until 2023.

     CBS said a relaxation of entry requirements for visitors in late March led to a rise in tourist arrivals and tourism earnings but the level remains below pre-pandemic levels and the labor market remains challenging, with skills mismatched.

     Credit to the private sector also declined in April from last year but CBS expects tourism to pick up gradually towards the end of this year though this is still subject to the uncertainties related to new virus variants and the effectiveness of vaccines.

     Headline inflation in Seychelles rose to 11.37 percent in May from 10.68 percent in April, the highest since October 2009.

     The Central Bank of Seychelles issued the following statement:

     

   

"Victoria – June 30, 2021

CBS implements a structural shift in the interest rate corridor and sets Monetary Policy Rate at 2.0% for Q3 2021

The Board of the Central Bank of Seychelles (CBS) has decided to maintain an accommodative Monetary Policy stance for the third quarter of 2021. Mindful of the prolonged challenges that threaten economic recovery, this stance is aimed to support domestic economic activity. In order to ensure interest rates in the market are aligned with prevailing macroeconomic fundamentals, the Board also approved a structural shift in the interest rate corridor. Consequently, the Monetary Policy Rate (MPR) will be at 2.0% whilst the interest rate on the Standing Deposit Facility (SDF) and Standing Credit Facility (SCF) will stand at 0.5% and 3.5%, 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.

The effects of the COVID-19 pandemic are still being felt across various sectors of the domestic economy and in general, economic activity remains weak. 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. One of the main impediments remain the issue of skills-mismatch.

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. However, 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, there was a sharp appreciation of the 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, 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. The supply of food has been heavily impacted by disruptions in production and transportation, amongst other supply-side constraints, which have led to an increase in prices over the last six months. 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 macroeconomic 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% was taken by the Board at its Monetary Policy Meetings held on June 21 and 28, 2021. Consequently, the interest rates on the SDF and SCF will stand at 0.5% and 3.5%, 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 Central Bank remains vigilant and stands ready to adjust its policies if necessary."

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