Central Bank moves to stabilise forex market

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Central Bank moves to stabilise forex market

Post  Sirop14 on Fri Jul 20, 2012 11:52 am

Central Bank moves to stabilise forex market -

The Central Bank of Seychelles (CBS) is taking measures to stabilise the foreign

exchange market after observing risen volatility in recent weeks, CBS governor Caroline

Abel said in an interview on Thursday.



The CBS is taking measures to stabilise the foreign exchange market after observing

She said a number of factors have pushed the cost of foreign exchange up and if not

curbed could lead to further inflation, assuring the public that the bank is taking

remedial measures, for example using some of its reserves to stall the declining value

of the rupee.

Ms Abel said the volatility has been driven in part by developments on the international

scene, namely the prevailing uncertainty in the Eurozone, which has translated into

speculative behaviour in the domestic market.

“Although the market fundamentals in terms of demand and supply have not shown

significant divergence compared to 2011 up to July 17, 2012, supply of foreign exchange

through authorised dealers – banks and bureau de changes – has dropped by only 0.3%,

while demand declined by 6.9% which shows that demand pressures have somewhat subsided,”

she said.

“Despite this, the rupee has depreciated by 14.5% against the US dollar and 6.9% against

the euro since the beginning of the year. For example, the monthly average exchange rate

moved from R13.9450 to the dollar in January 2012 to R14.2064 in May 2012, but

accelerated in June and July to stand at R14.9678 on July 17.”

She said the Central Bank is very concerned about the rapid depreciation of the domestic

currency, particularly in recent weeks given that it is translated into higher

inflation.

“This is also reflected in the increase in consumer price index as observed in the past

few months. As of June 2012, year-on-year inflation stood at 8.9% – up from 8.7% in May

– while the 12-month average rate was 5.5% , up from 4.9% in May.”

She said Seychelles being a net importer, depreciation of the domestic currency is

transmitted into higher prices in the domestic market.

“Given its mandate to maintain price stability, the Central Bank has tightened its

monetary policy stance since the second quarter of 2011. To that end, the bank uses its

own liquidity absorbing instruments to withdraw liquidity from the banking system.

In addition, Treasury Bills which are issued by the Ministry of Finance, Trade and

Investment are also used to mop up extra liquidity and these can be taken up by the

general public.

“Following further tightening in the monetary policy stance, an increase has been

observed in the average interest rate across all maturities and on all instruments, that

is CBS instruments and T-Bills. “This has started to be translated into higher deposit

rates at commercial banks and it is expected that this will continue,” she said.

“As an additional measure the Central Bank has decided to intervene in the foreign

exchange market in order to smooth out the excess volatility, and to provide orderly

market conditions as well as reduce any speculative element,” she said, adding the

strategy is also consistent with the bank’s price stability objective to contain

inflation.

“In that respect, the Central Bank stands ready to use the instruments at its disposal

to ensure that its primary objective is not jeopardised as well as the smooth

functioning of the financial system foreign exchange market,” she said.

Source Seychelles Nation

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