Central Bank of Seychelles Monetary Policy Decision Q3 2017 Media Presentation June 27, 2017
Evolution of Monetary Policy Pre-reform period Prior to the reforms in 2008, Seychelles implemented various forms of exchange rate targeting framework. Post-reform period Introduction of a monetary policy which seeks to establish price stability, with greater emphasis on liquidity management. A floating exchange rate regime was adopted alongside a Reserve Money Targeting Monetary Policy Framework.
Reserve Money Targeting Framework The primary objective is to be achieved by influencing the intermediate target of money supply growth, with reserve money being the operating target for the conduct of monetary policy What is reserve money? Reserve money is a component of monetary aggregate that the Bank seeks to influence to achieve price stability in the economy. Reserve money consists of: Currency in circulation and banks deposits with the Central Bank.
Change in Monetary Policy Framework and the impact on operations
What stays the same? Reserve money remains the nominal anchor CBS will continue to manage liquidity to achieve the reserve money target on a quarterly basis Deposit Auction Arrangements (DAA) will remain the main open market tool Standing facilities will remain open on a daily basis
What will change? More emphasis will be placed on guiding short term interest rates Interest rates on the standing facilities will be aligned with the overall policy Interest rate corridor will be 500 basis points wide and the DAA rates will be kept inside the corridor Board will decide on both the reserve money target and the standing facility rates quarterly Frequency of non-standard open market operations will decrease to 3 times a week CBS will become more transparent and give a clearer signal of the appropriate level for short term interest rates
Our expected results Financial markets to better understand the central bank s monetary policy Short term interbank rates will be firmly established within the interest rate corridor (standing facility rates) Central bank rates to anchor the longer term rates Stronger incentive for commercial banks to efficiently manage their liquidity
Monetary policy stance for the third quarter of 2017
Inaugural decision on the interest rate corridor Standing Credit Facility (SCF) at 6.0% Standing Deposit Facility (SDF) at 1.0% The SCF and SDF rates form the ceiling and the floor for overnight money market rates, i.e the interest rate corridor
Cautious loosening of monetary policy stance for the third quarter of 2017 The Board decided to cautiously loosen the monetary policy stance for the third quarter of 2017 The reserve money target is set at R3,353 million for Q3 2017, which implies a quarterly growth rate of 5.8% The interest rate corridor will be positioned as follows: - SCF at 6.0% and SDF at 1.0% CBS will remain vigilant and monitor inflationary developments during the quarter
Weak inflationary pressures externally
Modest increases in commodity prices not expected to have a strong impact on inflation Source: EIA Short Term Energy Outlook Source: Food and Agriculture Organization
Seychelles Rupees The rupee is on a slow depreciating trend with modest inflationary pressures 20.50 19.50 18.50 17.50 16.50 15.50 14.50 13.50 12.50 SCR/USD SCR/EUR SCR/GBP
Domestic economic activity remain below potential while in a recovery mode
Increase in tourist arrivals has been the main driver of the domestic growth while tuna production stagnates
Changed behaviour in tourism may have contributed to lower earnings in conjunction with a decline in tuna exports
Tons Tons Miln Ltrs Ltrs Ltrs Ltrs Nos Nos Nos Ltrs Kgs kwh klts klts Nos Hrs Nos Nos GB Fish catch Canned tuna Egg Production Beer Stout Spirits Soft drinks Mineral Water Tobacco (Cigarettes) Blocks Paint & Paint products Animal Feed Electricity (kwh) Water Consumption Water Production Telecom Services (Mobile Accounts) International Call Local Call Telephone Exchange Lines Data Traffic 2.2 PRODUCTION STATISTICS Q1 2017 (Q1 2017/Q1 2016) (%) 19.51 14.51-1.91 102.88-49.27 28.94 61.22-9.17 56.68 17.87-1.09-26.21 2.54 8.62 14.36 7.63-7.78 1.37-20.40 39.84 YTD growth (%) 6-3 -6 17-40 -40-13 -13 45 9 6-22 13 16 18 7-23 -29-2 102 Monetary Policy Discussions Q3 2017
These developments indicate a slowdown in GDP growth for Q1 2017 Annual growth turns negative because of negative quarterly growth in 2016 Q2 and Q3 *Last outcome 2017 Q1
Economic outlook for this year indicates a gradual increase in GDP growth Ongoing infrastructure projects expected to have a slight positive effect on growth Positive tourism performance expected to persist as the recovery in the Euro area continues Performance in tuna sector is more uncertain but expected to remain subdued
Money supply growth has slowed while interest rates have remained stable
During this year, money supply and credit growth have slowed while private sector credit rose 20 18 16 14 12 10 8 6 4 2 0 May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May 2016 2017 Total credit YoY Private credit YoY Money Supply YoY
7-day DAA rate stable so far this year
Consumer credit has biggest share of private sector credit and increased marginally during the year *Last outcome May 2017
Modest inflationary pressures expected
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Per cent (%) Revised 2017 figures show a pick up in inflation and monthly inflation is increasing 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0 Year-on-year CPI Apr May Month on Month (%) 0.6 0.7 Year on Year (%) 2.3 3.2 12-month average (%) 0.0 0.4 2016 2017 Year-on-year
Modest inflationary pressures expected Changes in indirect taxes on tobacco, fuel and alcohol have contributed to an increase in CPI inflation by 0.63 percentage points The rupee is not expected to depreciate as much as initially anticipated Weak rebound in global commodity prices expected going forward
Cautious loosening of monetary policy amidst modest inflationary pressures to boost real economic activity CBS ready to adjust the policy stance to safeguard price stability
7-day DAA rate stable so far this year
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