Pre-emptive move – Time to gradually return policy rate to neutral settings

Dr Kishti Sen. Picture: FILE

The policy rates in Fiji have been at emergency low levels for a long time and given our projections of economic activity over the next two years, we believe the time has come to return the policy rate to neutral settings to manage the economy, says ANZ economist Dr Kishti Sen.

In the ANZ Research February edition, ANZ senior economists Dr Sen and Tom Kenny highlight that the Reserve Bank of Fiji (RBF) hasn’t raised its policy rate since June 2006.

They added that instead, it had relied on liquidity management to achieve the desired lending rates.

Dr Sen said with interest rates slightly higher, the RBF would be hoping to temper consumer demand of discretionary imported consumer goods such as cars and by doing so, it would free up reserves or make room for private investment to flourish.

According to Dr Kishti this is important because Fiji needs private investment to step-up and take the baton from public demand and become a key driver of GDP and employment growth going forward.

“So, the rise in the policy rates will be a pre-emptive move to ensure Fiji’s economy continues to prosper in a sustainable way.

“We are not suggesting that the rate rises will be drastic. It won’t be. It will gradual and well communicated. Without any central bank intervention, we believe there are risks that foreign reserves and liquidity could track down sharply putting pushing pressure on banks’ cost of funds and lending rates like we saw in late 2018 and early 2019.

“In addition, if liquidity is allowed to remain high, CPI inflation could re-emerge through wage inflationary pressures which will be harder to peg back.

“It could mean more aggressive rate rises down the track. Hence, the need to tighten financial conditions from the latter part of this year so overall macroeconomic conditions remain stable and sustainable, in my view,” he shared.

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