Tuesday, December 21, 2021

Seychelles holds rate as Omicron a threat to recovery

      The central bank for the Indian Ocean island of Seychelles kept its interest rates steady for the first quarter of 2022, along with an accommodative monetary policy stance, saying it needs to continue to support the economic recovery despite the short-term inflationary risks.
      The Central Bank of Seychelles (CBS) kept its monetary policy rate (MPR) at 2.0 percent, unchanged since June this year when it was lowered by 1 percentage point as the bank continued to ease its policy stance to cushion the republic's tourism-dependent economy from the impact of COVID-19 pandemic.
      Since September 2019 CBS has cut the rate four times and by a total of 3.50 percentage points, including a total cut of 2.0 percentage points in 2020. 
      In June this year CBS also lowered banks' minimum reserve requirement on domestic currency deposits by 300 basis points to 10 percent and maintained this ratio today.
      The bank's board said the tourism industry had gradually recovered due to an easing of global travel restrictions but visitor arrivals and earnings remain below pre-pandemic levels.
       However, it also said emergence of new variants and rising COVID-19 cases pose a threat to the ongoing recovery of the global economy and could lead to stricter travel restrictions.
     "The latest identified variant - Omicron - has already started to curtail travel, but its broader impact on growth and inflation, both globally and locally, is yet to be fully considered and highlighted in economic outlooks," CBS said.
      Prior to the emergence of Omicron, the economy of the Seychelles - made up of 115 islands off the east coast of Africa - had begun to recover from the hit to global tourism and in early November the International Monetary Fund (IMF) said "the post pandemic economic recovery is expected to be V-shaped and driven by tourism.
      The economy of Seychelles grew 14.3 percent in the second quarter of this year after contracting 12.9 percent in 2020 and the IMF forecast growth of around 6 percent this year, rising to 7.7 percent in 2022.
      Inflation in the Seychelles has eased in recent months to 9.37 percent in November from a year-high of 11.37 percent in May and CBS expects inflation to slowly ease as the global economy normalizes.
     The IMF forecast inflation this year of 10.0 percent, up from 1.2 percent in 2020, and then 3.7 percent in 2022.

      The Central Bank of Seychelles issued the following statement:

"Monetary Policy Rate remains unchanged at 2.0% for Q1 2022

The Board of the Central Bank of Seychelles (CBS) has decided to maintain the Monetary Policy Rate (MPR) at 2.0% for the first quarter of 2022. Mindful of the prolonged challenges to economic recovery, the stance continues to support domestic economic activity. Although visitor arrivals and earnings remain below pre-pandemic levels, the performance of the tourism industry has gradually improved. This is mainly on account of the continued easing of restrictions in the source markets and increased connectivity to various destinations. Nonetheless, the emergence of new variants and rising COVID-19 cases pose a threat to the ongoing recovery of the global economy and could lead to stricter travel restrictions. Despite the strengthening of the domestic currency, rising international commodity prices and high global shipping costs have kept domestic inflationary pressures elevated. However, this is expected to lessen with the gradual normalisation of the global economy. Despite the short-term inflationary risks, CBS foresees the need to support the economy in order to set the conditions for a full economic recovery. Consistent with the unchanged MPR, the interest rate on the Standing Deposit Facility (SDF) and Standing Credit Facility (SCF) will remain at 0.5% and 3.5%, respectively.

Improvements related to tourism activities since the relaxation of entry requirements for visitors in late March have contributed to a positive performance of domestic economic activities. The increased frequency of flights by existing carriers and a reopening of the cruise ship season have resulted in a boost in visitor arrivals. Furthermore, the gradual lifting of travel restrictions in key tourism source markets has led to a significant rebound in arrivals from Europe as well as a stronger performance of the Asian market. Production statistics were generally positive in line with growing domestic demand, although output is constrained by temporal disruptions caused by supply-chain difficulties. The related shortfalls in production are expected to dissipate as raw material inputs become available in the coming months.

In line with the improved level of foreign currency inflows associated with a pick-up in the tourism sector, the domestic currency appreciated in the second and third quarters of the year. Statistics for November 2021 thus far show that both demand and supply of foreign exchange have been higher than the same period in 2020, with demand slightly exceeding supply. The seasonal pick-up in demand associated with the end-of-year festive season seems to have materialised later than expected and was partly due to trade-related disruptions and uncertainty. Whilst the exchange rate has remained relatively stable, it continues to be dependent on movements in aggregate supply and demand, and consequently, the underlying factors that influence these indicators.

On the external front, international commodity prices continued to be heavily impacted by strong demand following a pick-up in global activity amid tight supply conditions. Food and oil prices are expected to remain elevated but gradually decline in 2022 on the prospect of a better supply outlook relative to global consumption, although this may be subject to renewed concerns about new COVID-19 variants. In contrast, shipping constraints and high freight costs are set to persist and are anticipated to affect global consumer prices in the near term

Given the structure of the domestic economy, its recovery is conditional on external developments, key of which being a revival of the global travel and tourism industry. Nevertheless, the recovery process may be hindered by the emergence of new COVID-19 variants and the effectiveness of existing vaccines, in addition to rising uncertainty regarding the overall willingness to travel and the containment measures employed by countries wary of the new strains. The latest identified variant – Omicron – has already started to curtail travel, but its broader impact on growth and inflation, both globally and locally, is yet to be fully considered and highlighted in economic outlooks.

The decision to maintain an accommodative stance was taken by the Board at its Monetary Policy Meeting held on December 20, 2021. In line with this, the MPR remains at 2.0% and the interest rates on the SDF and SCF will be kept at 0.5% and 3.5%, respectively. The Minimum Reserve Requirement (MRR) on applicable rupee-denominated deposits will be maintained at 10 per cent and 13 per cent for foreign currency deposits of residents.

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



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