Reserve Bank warns global fuel and shipping disruptions could push up costs, while analysts say faster investment and infrastructure development may help strengthen Tonga’s economic resilience.

Tonga could soon face rising prices linked to the escalating conflict in the Middle East, according to the National Reserve Bank of Tonga, which this week released its February 2026 Monetary Policy Statement.

The Reserve Bank warned that global instability and disruptions to fuel and shipping routes could create an inflation shock for the Tongan economy, increasing pressure on the cost of living for households and businesses.

At a meeting with commercial banks and government officials on 9 March, the Bank confirmed it would maintain a “neutral” monetary policy stance, keeping its policy rate unchanged at 2 percent for the next six months.

Governor Tatafu Moeaki said the Bank would continue to monitor global developments closely, particularly the economic consequences of the conflict in the Middle East.

“Even before the recent escalation in the Middle East, the outlook for Tonga was already becoming more challenging amidst rising global fragmentation and geopolitical tensions,” the Governor said.

“A short and contained conflict may lead to a temporary inflation shock. However, prolonged disruption — particularly affecting fuel and shipping costs — could intensify cost-of-living pressures on households and businesses.”

Inflation pressures remain

The Reserve Bank said headline inflation eased to 3.1 percent in December 2025, below the Bank’s reference rate of 5 percent.

However, core inflation remains significantly higher at around 10 percent, indicating that underlying domestic price pressures are still elevated.

Economic growth also remains modest. The Bank estimates Tonga’s real GDP grew 2.5 percent in FY2025, below the Pacific regional average of 2.9 percent and the global average of 3.3 percent.

Foreign reserves remain above minimum thresholds and the financial system is considered stable, although the Bank warned that the medium-term outlook is becoming more uncertain.

For now, the central bank’s approach is to maintain stability while closely watching global developments before considering any tightening of monetary policy.

Global shocks quickly reach Tonga

For small island states such as Tonga, conflicts thousands of kilometres away can quickly push up prices at home.

Much of the country’s fuel and goods move through global shipping networks tied to energy markets in the Middle East and Asia. When oil prices rise or shipping routes are disrupted, the effects ripple through electricity costs, transport, freight and ultimately food prices.

Industry estimates suggest global shipping costs could rise significantly if tensions escalate further, potentially pushing freight prices sharply higher across the Pacific.

For import-dependent economies, these external shocks often drive inflation far more than domestic economic activity.

Growth seen as part of the solution

While monetary policy can help stabilise the financial system, many of the pressures facing Tonga originate outside the country’s control.

Some economists and business leaders argue that strengthening economic resilience will also require faster domestic growth.

The Reserve Bank itself has estimated Tonga’s long-term growth trend at around 1.5 percent, a rate many analysts consider too slow to absorb rising living costs, unemployment pressures and productivity challenges.