Fiji maintains rate but sees significant downside risks

    Fiji's central bank left its key interest rate unchanged but turned more pessimistic about the economic outlook due to a resurgence of COVID-19 infections in Australia and New Zealand, delaying the resumption of international air travel and the "return to some form of normalcy," for tourism, its largest industry.

    The Reserve Bank of Fiji (RBF) kept its Overnight Policy Rate (OPR) at 0.25 percent, unchanged since March when it cut its rate in half in the first rate cut since November 2011.

    "The outlook for Reserve Bank's twin monetary policy objectives of low inflation and comfortable level of foreign reserves remain intact," RBF said, adding:

    "However, the persistence of the pandemic and the associated delay in the resumption of international travel is a significant downside risk to the outlook.

    The central bank said it would continue to monitor economic developments and "align monetary policy where appropriate."

    Consumption and investment in Fiji remain well below a year ago and in line with the sharpest economic contraction on record, the bank said, adding the financial sector remains stable for now.

    Liquidity in the banking system is at record highs, boosted by the government's draw down of an external loan and to ensure that businesses that are affected by the pandemic have access to cheaper credit, the Disaster Rehabilitation and Containment Facility has been further raised by $50 million to $150 million, the bank's governor Ariff Ali said in a statement.

    Fiji is continuing to experience deflation with consumer prices down 1.6 percent in July, the 10th straight month of lower consumer prices and RBF expects end-year inflation of minus 3.0 percent given subdued domestic demand and lower taxes and duties on a number of products.

     Foreign reserves remain at a comfortable level of $2.283 billion, or 8.3 months of imports, up from $2.111 billion at the end of July.

    The Reserve Bank of Fiji issued the following statement:

"The Reserve Bank of Fiji Board at its meeting on 27 August kept the Overnight Policy Rate unchanged at 0.25 percent.

In announcing the decision, the Governor and Chairman of the Board, Mr Ariff Ali stated that “the COVID-19 pandemic continues to soar across the globe. The resurgence of infections in Australia and New Zealand will now further delay the resumption of international travel to Fiji and defer the return to some form of normalcy of tourism, our largest industry. On a positive note, there has been some progress in finding a vaccine with eight vaccines currently in large scale testing while two vaccines have been approved by local authorities for limited use in China and Russia. Domestically, partial indicators for consumption and investment remain well below those recorded a year ago and are in line with the forecast for the sharpest economic contraction on record. However, recent sectoral data shows some improvements over the month.”

Governor Ali added that the financial sector remains stable for now and banking system liquidity reached a record high of $992.6 million on 17 August, boosted by the Government’s drawdown of an external loan. To ensure businesses affected by the pandemic continue to have access to cheaper credit, the Disaster Rehabilitation and Containment Facility has been increased further by $50 million to $150 million.

Consumer prices continue to fall as the inflation rate was -1.6 percent in July. Deflation is expected to continue in the months ahead and year-end inflation is expected at -3.0 percent, given the subdued domestic demand and the reduction of taxes and duties on a number of products announced in the 2020-21 National Budget. Projected lower prices for alcohol, yaqona, food, fuel and transport underpin the negative inflation outlook for the end of the year. Foreign reserves (RBF holdings) remain at comfortable levels and are currently around $2,283.6 million (27/08), sufficient to cover 8.3 months of retained imports of goods and services and are anticipated to be adequate over the medium term.

The outlook for Reserve Bank’s twin monetary policy objectives of low inflation and comfortable level of foreign reserves remain intact. However, the persistence of the pandemic and the associated delay in the resumption of international travel is a significant downside risk to the outlook. The Reserve Bank will continue to closely monitor economic developments and risks and align monetary policy where appropriate."

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