Economy: IEOM measures in the face of inflation in the Pacific franc zone

Given the increase in inflation observed in the Pacific franc zone and the monetary policy decisions of the European Central Bank (ECB), the Overseas Issuance Institute (IEOM) decided after its supervisory board on 15 September 2022 to increase its reference rates. The Overseas Issuing Institutes (IEDOM-IEOM) shed light on the inflation currently observed in overseas territories and on recent monetary policy decisions.

Rising prices are now a major challenge within the euro zone, where it peaked at 9.1% in August 2022. What about France?

The massive and simultaneous rebound in global demand after the 2020 health crisis, freight transport difficulties and subsequent confinements, particularly in China, then the war in Ukraine and energy supply problems have pushed prices up. Although France is experiencing the lowest inflation in the euro zone, at 5.8% in August, thanks in particular to the tariff shield that allows the increase in electricity and gas tariffs to be moderated, this really remains a major challenge.

What about inflation in overseas territories?

In overseas France, inflation is mainly driven by energy and food prices. It follows the same upward trend as in France, with different situations depending on the department: year on year, at the end of July, inflation was 4.5% in Guadeloupe, 4.9% in Martinique, 5.6% in Reunion and 6.1% in Mayotte.

Local authorities in the Pacific franc zone are also characterized by a significant rebound in inflation. In French Polynesia, inflation reached 7.2% yoy in August 2022 after 6.9% in July. Prices also increased in New Caledonia, with inflation at 5.0% in August 2022, after 3.9% in July.

Why do we have to fight inflation?

In the euro zone as in the Pacific franc zone, price pressures are spreading to many sectors, without wages following the same progression. Inflation reduces the purchasing power of consumers and limits the investment capacity of companies. It also reduces the valuation of savings. Economic actors feel this more acutely, especially since prices in overseas territories are often set at higher levels than those observed in France, particularly due to transport costs and the narrowness of the specific internal markets of each territory. .

How to fight inflation?

Central banks are raising key rates to fight inflation. These interest rates are what commercial banks pay their central bank to cover their financial needs or raise to invest their liquidity. When the ECB for the euro zone and the IEOM for the Pacific franc zone raise rates, as they have been doing since July, commercial banks also see tightening conditions for refinancing: the cost of money increases. Commercial banks pass on the increased cost of their refinancing to the rates of loans granted to their customers, both private and corporate. This encourages economic actors, businesses and households to borrow less to invest and consume. This translates into a reduction of the currency in circulation, accompanied by a less dynamic economic activity, which allows definitely to reduce inflation.

What actions are being taken to combat inflation in the Pacific franc zone?

Following economic developments in the Pacific franc zone, the Overseas Issuance Institute (IEOM) adapted the state monetary policy implemented in New Caledonia, French Polynesia and Wallis and Futuna. The rate hike that began in July 2022 continued on September 15: commercial banks now receive 0.75% remuneration when they deposit their reserves in IEOM accounts, refinance themselves over 6 months at 0.95% and can benefit from cash in 48 hours to cover one-off needs at the rate of 1.50%.

Shouldn’t the IEOM’s key rate hike slow the development and financing of Pacific franc economies?

The rate hikes decided by the IEOM and implemented in the Pacific franc area take into account the smaller economic rebound in the Pacific area compared to the euro area. The interest rates offered for long-term refinancing therefore remain lower for local banking institutions than for those in the euro area. The IEOM also maintains the existing refinancing facility which, since 2020, has provided resources to local banks and thus supported the financing of the economy. In addition, in the Pacific franc area there is a specific mechanism that facilitates the access of small and medium-sized enterprises to bank financing: the deferral of credit, which makes it possible to limit the rate applicable to SMEs to 3.60%, despite the increase. of the rate decided by the IEOM on 15 September.

See also:

Monetary Policy Decisions of the Supervisory Board of September 15, 2022 – IEOM

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