Thursday, September 24, 2020

Egypt cuts rate 2nd time in 2020, inflation below target

     Egypt's central bank cut its key interest rates for the second time this year, saying recent data showed inflation expectations were declining so a reduction in the policy rate would support economic activity while still remaining consistent with achieving price stability.
     The Central Bank of Egypt (CBE) cut its overnight deposit rate, its overnight lending rate and the rate on its main operation by 50 basis points each to 8.75 percent, 9.75 percent and 9.25 percent, respectively.
     The discount rate was cut 50 basis points to 9.25 percent.
     It is CBE's second rate cut this year after a 300 basis-point cut at an unscheduled monetary policy meeting on March 16 with the result that rates have been cut by a total of 350 basis points this year.
     Since February 2018, when CBE began easing its monetary policy stance in response to lower inflationary pressures, key interest rates have been cut by a total of 10 percentage points.
     Egypt's inflation rate dropped to 3.4 percent in August, the second lowest rate seen in almost 14 years after October 2019 and down from 4.2 percent in July, with CBE saying this continues to reflect "muted" inflationary pressures.
     This month annual core inflation is expected to be affected by unfavorable base effects due to the change in the consumer price index but CBE confirmed it still it expects average annual inflation to hover around the lower bound of its inflation target of 9 percent, plus/minus 3 percentage points in the fourth quarter of this year.
     Preliminary data shows that Egypt's economy expanded 3.5 percent in the 2019/20 fiscal year, which ended June 30, down from 5.6 percent in the previous year while the unemployment rate jumped to 9.6 percent in the second calendar quarter from 7.7 percent in the first quarter due to the impact of COVID-19 on the economy.
     "However, the stability of some leading indicators in August and July after signs of improvement in June point to a gradual recovery in economic activity," CBE said.

Turkey raises rate 1st time in 2 years to contain inflation

      Turkey's central bank raised its key interest rate for the first time in two years, saying inflation has been tracking higher than expected due to the country's fast economic recovery and it "assessed that the tightening steps taken since August should be reinforced in order to contain inflation expectations and risks to the inflation outlook."
      The Central Bank of the Republic of Turkey (CBRT) raised its one-week repo rate by 200 basis points to 10.25 percent, unwinding some of the 375 points of rate cuts earlier in the year. This leaves the one-week repo rate 175 basis points below its level at the start of the year.
      The last time CBRT raised its rate was in September 2018 when it was raised to 24.0 percent as part of three rapid rate hikes in 5 months to contain inflation in response to a fall in the lira and capital outflows.
      But since July 2019, when the current governor, Murat Uysal, was installed, the central bank had been on an easing cycle and cut rates 9 times in a row and by a total of 15.75 percentage points, with the latest cut in May.
      CBRT is the 8th central bank to raise rates this year but 3 of those hikes (Tajikistan, Czech Republic and Kazakhstan) took place before global monetary policy took a sharp U-turn in the face of the economic damage from the COVID-19 pandemic. These three hikes were later reversed by rate cuts.
       It is the first central bank among the Group of Twenty (G20) major economies that represent some 85 percent of the global economy to have raised its rates since the outbreak of the COVID-19 pandemic earlier this year and the first emerging market central bank since March to raise its rates in response to inflationary pressures.
      CBRT said maintaining a sustained process of disinflation was key to lower long-term interest rates, a stronger economic recovery and lower sovereign risk and this requires a continuation of a "cautious monetary stance" that takes into account the underlying trend of inflation.
     "Accordingly, the Committee decided to increase the policy rate by 200 basis points to restore the disinflation process and support price stability," CBRT said.
      Although Turkey's headline inflation rate was stable at 11.77 percent in August from 11.76 percent in July, the lira has been weakening steadily for the last decade - putting upward pressure on import prices and thus inflation - and has plunged 23 percent since Aug. 1 on negative real interest rates, concern over the central bank's low foreign exchange reserves and tensions with the European Union over the east Mediterranean.
      Instead of outright rate hikes to its benchmark interest rate, CBRT has resorted to other tightening measures, including directing lenders to borrow at higher rates and in August raised reserve ratios to drain liquidity from the market and boost reserves.
      In response to the rate hike, the lira jumped 1.3 percent to 7.59 to the U.S. dollar but remains down almost 22 percent since the start of this year.
      CRBT said the rise in inflation from pandemic-related supply-side factors was expected to gradually phase out as weak demand curbs price rises.
     "Yet, as a result of fast economic recovery with strong credit momentum, and financial market developments, inflation followed a higher-than-envisaged path," CRBR said.
      Turkey's economy shrank an annual 9.9 percent in the second quarter of this year, and by a quarterly 11 percent, but CBRT said economic activity was recovering markedly in the third quarter as commercial loans have begun to normalize and tourism has begun to improve.
     "The recovery in exports of goods, relatively low levels of commodity prices and the level of the real exchange rate will support the current account balance in the upcoming periods," CBRT added.

Wednesday, September 23, 2020

Mauritius maintains rate, sees sharper 2020 contraction

     The central bank of the Indian Ocean island of Mauritius left its benchmark interest rate steady but lowered its forecast of economic growth this year to a contraction of 13 percent versus its July forecast of a 12.5 percent contraction as its economy continues to suffer from the impact of the COVID-19 pandemic.
      The Bank of Mauritius (BOM) kept its key repo rate (KRR) at 1.85 percent after cutting it by a total of 150 basis points in March and April.
     Although the global economy is showing some signs of improvement, the pace of the recovery depends on containment of the pandemic and the domestic economy is still facing the disruptive effects of COVID-19 as cautious spending and economic uncertainty continue to impact both household spending and private investment.
     "The contraction in major trading partners' output would result in weaker demand for our exports," BOM said, noting its staff had revised down its projection for gross domestic product growth for 2020 to minus 13.0 percent from an earlier minus 12.5 percent.
     For 2021 GDP is seen growing about 7.5 percent, slightly up from an earlier forecast of 7 percent growth.
     In the first quarter of this year Mauritius' economy contracted by 2.0 percent year-on-year, the first contraction since 2005, with tourism hard hit. 
     Inflation was steady at 1.5 percent in August and July and BOM forecast inflation of around 2.5 percent in both 2020 and 2021.
     After falling in March, the Mauritian rupee has been relatively stable, trading at 39.9 to the U.S. dollar today, down 8.8 percent this year.

Tuesday, September 22, 2020

New Zealand holds policy but stimulus may be needed

    New Zealand's central bank left its benchmark interest rate and its current asset purchase program steady but added that "further monetary stimulus may be needed in order to achieve its remit objectives" as a "severe and prolonged economic downturn would make it difficult to achieve its inflation and employment objectives, and at the same time would pose a material risk to financial stability."
     The Reserve Bank of New Zealand (RBNZ), which last month expanded its asset purchase program for the second time to lower the interest rates for households and businesses, kept its Official Cash Rate (OCR) at 0.25 percent, unchanged since it was cut by 75 basis points in March.
     In August RBNZ raised its Large Scale Asset Purchase (LSAP) program to up to $100 billion from $60 billion and said it was actively preparing for additional monetary stimulus, such as a Funding for Lending Programme (FLP), a negative OCR and purchases of foreign assets.
     Although the recent outbreak of COVID-19 in New Zealand had now been contained and measures to contain the virus were being relaxed, the bank's monetary policy committee agreed the pandemic and travel restrictions could have a significant long-term negative effect on the economy, with lower potential growth, and the outlook for inflation and employment remains subdued.
      "There is substantial uncertainty about the future spread of COVID-19 both domestically and globally, and how economic, health and social activity will adapt," RBNZ said.
     While the contraction of gross domestic product in the second quarter of 12.2 percent from the first quarter was less than expected, it came after a 1.4 percent quarterly contraction in the first quarter, and the balance of risks to the economy remain to the downside.
     At its meeting, the policy committee had discussed the sequencing of how to deploy any additional stimulus, with bank staff advising that deploying FLP with rates near the OCR before the forward guidance period for OCR ends could provide additional stimulus to the economy sooner and this would also provide certainty to financial instituions and speed up the transmission of the programme.
     RBNZ added that members of the committee had agreed they preferred to launch and FLP before the end of 2020 and the banking system is on track to be operationally prepared for negative interest rates by year end.

Sweden keeps monetary stance, sees slow recovery

     Sweden's central bank left its key interest rate steady and confirmed it will continue to purchase assets and offer liquidity as it expects the economic recovery from the COVID-19 pandemic to be "long and fraught with uncertainty" despite a faster than expected improvement in recent months.
     Sveriges Riksbank, which escaped almost five years of negative interest rates in December 2019, kept its repo rate at 0.0 percent and confirmed its forecast from July that it expects to maintain this rate through the third quarter of 2023 as inflation will remain below its target.
     "The Riksbank's measures mean that there will be comprehensive monetary policy stimulus in the form of low interest rates and a large amount of liquidity for the foreseeable future," the Riksbank said, repeating it is willing to cut the repo rate again if it were an effective response to threats to inflation.
     As most other countries, the Riksbank raised its forecast for economic growth this year to a contraction of 3.6 percent in gross domestic product from July's forecast of a 4.5 percent contraction. 
     Sweden's GDP shrank 8.3 percent in the second quarter of this year from the first quarter for an annual fall of 7.7 percent after growing 0.7 percent year-on-year in the previous two quarters.
     "The Swedish economy seems to have left the acute crises situation of the spring and started to recover slightly faster than expected," the Riksbank said.
      However, it also underlined the "way back is long and fraught with uncertainty" as the effects of the pandemic on the global economy are expected to be prolonged and with plenty of risks of setbacks.
      Sweden's economy is seen expanding 3.7 percent in 2021, slightly up from July's forecast of 3.6 percent, then 3.7 percent in 2022 and by 2.2 percent in the third quarter of 2023.
     But unemployment is expected to remain high and only slowly decline from an average of 8.6 percent this year to 7.6 percent by the third quarter of 2023 and headline inflation is expected to remain below the 2.0 percent target.
     Sweden's inflation rate rose to 0.8 percent in August from 0.5 percent in July and is forecast to average 0.6 percent this year, 1.1 percent in 2021, 1.3 percent in 2022 and reach 1.9 percent by the third quarter of 2023.
     Earlier this month the Riksbank began buying corporate bonds for the first time as part of its quantitative easing program that it expanded at its last policy meeting in July. 
     The Riksbank, which has been purchasing assets, mainly government bonds, since February 2015 when it also adopted negative interest rates, boosted its purchase target by 200 billion Swedish krona to 500 billion and extended the period to June 2021.
      The central bank plans to buy 10 billion krona of corporate debt between Sept. 1 and June 30, 2021 in adding to the purchase of government bonds, mortgage debt and municipal bonds of 100 billion from Oct. 1 to December 1, 2020.
     After tumbling in early March, Sweden's krona rose sharply from mid-March through July but has been  slightly weaker since then.
      Today the krona was trading at 8.85 to the U.S. dollar, up 5.7 percent this year.

Monday, September 21, 2020

Pakistan pauses after 5 rate cuts, stance appropriate

     Pakistan's central bank left its key interest rate steady after five cuts earlier in the year, saying the current monetary policy stance remains "appropriate to provide needed support to the emerging recovery, while keeping inflation expectations well-anchored and maintaining financial stability."
     The State Bank of Pakistan (SBP) left its policy rate at 7.0 percent after cutting it five times this year by 625 basis points.
     The bank's monetary policy committee said business confidence and the outlook for growth had improved since its last meeting in June, reflecting the decline in COVID-19 cases, the easing of lockdowns along with the stimulus provided by the government and itself.
     SBP normally decides on monetary policy every two months but scrapped its July meeting in light of the extraordinary meetings this year, including one in April, in response to the spread of the pandemic, and because it considered the policy stance appropriate.
     SBP said today's decision, which was expected, comes as its forecast for inflation has risen slightly due to recent supply shocks to food prices and it now expects inflation to average within its previously announced range of 7.0 to 9.0 percent for fiscal 2020/21, which began July 1, rather than below.
     Pakistan's inflation rate eased to 8.2 percent in August from 9.26 percent in July but SBP said core inflation had been relatively stable and demand-side risks to inflation well contained.
     Financial conditions remain accommodative and the bank's measures since the outbreak of the virus have injected an estimated stimulus of 1.58 trillion rupees, or about 3.8 percent of gross domestic product, to the cash flow of businesses and households.
     After a deep economic contraction between March and June, SBP said the large-scale manufacturing index had returned to expansion in July, growing 5 percent year-on-year, but the economic recovery still remains uneven across industries, with hospitality especially lagging, and the general level of activity still below pre-Coronavirus levels.
     Going forward, SBP expects economic growth of slightly above 2 percent in FY21 after contracting 0.4 percent last year, with the recovery mainly driven by manufacturing-related activities and construction, which are supporting by both the central bank and the government's incentives.
     Despite the challenging environment, SBP said the external sector had remained resilient since the COVID-19 outbreak, with the flexible market-determined exchange rate helping absorb shocks while low global oil prices and subdued domestic demand helped narrow the current account deficit.
     A gradual recovery of exports is expected and remittances have been strong, rising to a monthly high in July and topped US$2 billion for the last three months.
     This has helped SBP's foreign exchange reserves rebound to pre-pandemic levels of around US$12.8 billion and now back above the benchmark of 3 months of import cover.
     Pakistan's rupee has been relatively stable this month after falling sharply in March, as most other currencies, and was trading at 166.0 to the U.S. dollar today, down 6.7 percent this year.

Sunday, September 20, 2020

This week in monetary policy: China, Pakistan, Honduras, Sweden, Hungary, Morocco, Nigeria, New Zealand, Thailand, Czech Republic, Mauritius, Paraguay, Fiji, Switzerland, Norway, Turkey, Egypt, Mexico, Colombia and Trinidad & Tobago

    This week - September 21 through September 26 - central banks from 20 countries or jurisdictions are scheduled to decide on monetary policy: China, Pakistan, Honduras, Sweden, Hungary, Morocco, Nigeria, New Zealand, Thailand, Czech Republic, Mauritius, Paraguay, Fiji, Switzerland, Norway, Turkey, Egypt  Mexico, Colombia and Trinidad and Tobago.
     Following table includes the name of the country, the date of the next policy decision, the current policy rate, the result of the last policy decision, the change in the policy rate year to date, and the rate one year ago.
    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

SEP 21 - SEP 26, 2020:
CHINA21-Sep3.85%0-304.20%         EM
PAKISTAN21-Sep7.00%-100-62513.25%         EM
SWEDEN22-Sep0.00%00-0.25%         DM
HUNGARY22-Sep0.60%0-300.90%         EM
MOROCCO22-Sep1.50%-50-752.25%         FM
NIGERIA22-Sep12.50%0-10013.50%         FM
NEW ZEALAND23-Sep0.25%0-751.00%         DM
THAILAND23-Sep0.50%0-751.50%         EM
CZECH REPUBLIC23-Sep0.25%0-1752.00%         EM
MAURITIUS23-Sep1.85%0-1503.35%         FM
SWITZERLAND24-Sep-0.75%00-0.75%         DM
NORWAY24-Sep0.00%0-1501.50%         DM
TURKEY24-Sep8.25%0-37516.50%         EM
EGYPT24-Sep9.25%0-30013.25%         EM
MEXICO24-Sep4.50%-50-2757.75%         EM
COLOMBIA25-Sep2.00%-25-2254.25%         EM
TRINIDAD & TOBAGO25-Sep3.50%0-1505.00%                    

Friday, September 18, 2020

Azerbaijan cuts rate 16th time to keep inflation in target

     Azerbaijan's central bank cut its key interest rate for the fourth time this year and for the 16th time in 2-1/2 years, saying this will support demand, accelerate the economic recovery and help keep inflation within its target.
     The Central Bank of the Republic of Azerbaijan lowered its discount rate by another 25 basis points to 6.50 percent and has now cut it by 100 points this year following cuts in January, June and July.
     Since February 2018, when CBA began its monetary easing cycle, the rate has been cut 16 times and by a total of 8.50 percentage points from 15.0 percent.
     The central bank added future decisions about the interest rate corridor would be based on the balance of risks, the trajectory of inflation, the international situation and the foreign exchange market.
     The lower limit of CBA's rate corridor is now 6.0 percent and the upper limit at 7.0 percent.
     Azerbaijan's inflation rate was largely steady at 2.8 percent in August from 2.9 percent in July, below the midpoint of CBA's target range of 4.0 percent, plus/minus 2 percentage points, due to weak aggregate demand.
      Inflationary expectations in the real sectors of the economy continue to decline, CBA said, adding it had adjusted its inflation forecast and now expects inflation of 3.0 to 3.2 percent by the end of this year, below the center of its target range.
     "Although there has been some improvement in global economic activity with the partial easing of the quarantine regime in many countries, the recovery process has been very slow amid expectations of a second wave of the epidemic," CBA said, adding volatility in financial markets, including currency and commodity markets, had risen this month.
     "The continuation of the quarantine regime in many countries around the world hinders the continued recovery of oil demand," CBA added.
     Azerbaijan is one of the birthplaces of the oil industry with the first oil well in the world drilled in 1846 and the first oil refinery built in Baku in 1878.
     Despite low oil prices this year, Azerbaijan's foreign trade balance has remained in surplus, helping boost its foreign exchange reserves that currently stand at US$51.4 billion, up 0.6 percent this year. 
      The currency market has remained stable and increased transfers from the country's oil fund in connection with the state budget will provide additional support and balance the foreign exchange market, CBA said.
      The bank added the rate of decline in the country's non-oil sector has slowed due to an easing of pandemic-related restrictions, with the bottom of the decline in gross domestic product in the non-oil sector of 2.5 percent at the end of the first half and a 1.7 percent declined at the end of August.


Wednesday, September 16, 2020

Brazil pauses after 21 rate cuts, no plans to trim stimulus

     After 21 rate cuts in almost four years, Brazil's central bank paused and kept its rate steady but said it was not planning to reduce the current level of monetary stimulus unless inflation expectations and the projected inflation rate gets sufficiently close to its inflation target in the next two years.
    The Central Bank of Brazil (BCB) left its benchmark Selic rate at 2.0 percent after cutting it 12 percentage points since October 2016, including five rate cuts this year by 250 basis points.
     Copom, the bank's policy-setting committee, said today's decision reflected its baseline scenario for inflation, a higher-than-usual variance in the balance of risk, and is consistent with inflation returning to its target over the forecast horizon that includes 2021 and to a lesser extent 2022.
     The decision to maintain the rate comes after the central bank last month said any remaining space for further monetary easing was now small and any further changes to the degree of stimulus would be gradual and depend on the outlook for fiscal policy and inflation.
     Copom said current economic conditions continue to call for "unusually strong monetary stimulus," but for prudential and financial stability reasons, the "remaining space for monetary policy stimulus, if it exists, should be small."
      Any "possible future adjustments to the current degree of stimulus would thus be gradual and depend on the fiscal trajectory as well as any changes to the bank's view of the path of inflation, Copom added.
     Copom said it would now use forward guidance as an additional tool of monetary policy to provide the stimulus considered adequate to meet the inflation target.
     Forward guidance has become widely used by central banks in advanced economies where interest rates have been close to the lower bound but less so in emerging markets where interest rates in general are higher and vulnerabilities of the financial system greater.
     Although BCB has used forward guidance on some occasions in the past, last month it specifically adopted the strategy of forward guidance to ensure market interest rates remain low.
     The central bank's president, Roberto Campos Neto, has acknowledged BCB is now testing the lower bound of interest rates for an emerging market country while also realizing the need for stimulus to help the economy recover after the COVID-19 pandemic.
      Brazil's inflation rate rose to 2.44 percent in August from 2.31 percent in July and Copom expects inflation to rise in the short term due to temporary increases in food prices and a partial normalization of prices of some service as part of a recovery of economic activity.
     However, measures of underlying inflation remain below the level that is compatible with meeting the bank's inflation target of 4.0 percent, plus/minus 1.5 percentage points, BCB said, adding inflation expectations from the weekly Focus survey show 2020 inflation of around 1.9 percent, 3.0 percent for 2021 and 3.5 percent for 2022.
     Copom's own inflation projections based on a constant exchange rate of 5.30 real to the U.S. dollar are around 2.1 percent for 2020, 2.9 percent for 2021 and 3.3 percent for 2022. This scenario also assumes the Selic rate will end this year at 2.0 percent before rising to 2.5 percent in 2021 and 4.50 percent in 2022.
     Brazil's economy shrank 9.7 percent in the second quarter from the first quarter, which shrank 2.5 percent, but the central bank said recent data suggested a partial recovery of economic activity.
      However, uncertainty about economic growth remains larger than usual, especially fore the period beginning at the end of this year in connection with the expected unwinding of stimulus programs.
     Earlier this month Campos Neto said the bank was forecasting a contraction in gross domestic product this year of around 5 percent and then a recovery of more than 4 percent in 2021.

Armenia cuts rate 4th time in 2020 on low inflation

     Armenia's central bank lowered its key interest rate for the fourth time this year and said it was leaning toward continuing monetary stimulus in the medium term due to the low rate of low inflation and a delay in a recovery of domestic and international demand.
     The Central Bank of Armenia (CBA) cut its benchmark refinancing rate by another 25 basis points to 4.25 percent and has now cut it by 125 points this year following earlier cuts in March, April and June.
     CBA has been gradually lowering its refinancing rate since August 2015 when the rate was 10.50 percent. Initially, the rate was cut by 450 basis points in 12 steps until February 2017, when it was kept unchanged for almost two years.
     But in January 2019 CBA returned to the easing path and since then the rate has been cut six times by a total of 175 basis points.
     Although the the world economy is recovering from measures to contain the COVID-19 pandemic, CBA said there is still a high degree of uncertainty related to fully overcoming the pandemic and this will significantly restrain and delay the complete recovery of demand and economic activity in Armenia's main trading partners.
     Under those conditions, these countries will continue to pursue monetary stimulus with the result the board of CBA does not expect the external sector to have any inflationary impact on Armenia's economy.
      Armenia's inflation rate rose to 1.8 percent in August from 1.5 percent in July and although it is expected to gradually rise and average around 2.5 percent this year it will first stabilize around the target at the end of the forecast horizon as domestic demand and economic activity recovers at a slower-than-expected pace.
     CBA targets inflation of 4.0 percent, plus/minus 1.5 percentage points.
     Armenia's gross domestic product contracted by an annual 13.7 percent in the second quarter after expanding by 3.9 percent in the first quarter, in line with CBA's forecast, and in July economic activity was below expectations due to a decline in the services sector.
     The central bank's board said it remains convinced more fiscal stimulus is key to restoring overall domestic demand in addition to monetary stimulus because different sectors have suffered disproportionate losses and monetary policy has more of an overall impact.
     It added the risks of inflation deviating from its forecast is largely balanced but in the event it deviates, it is ready to respond accordingly to ensure price stability.
     CBA raised its forecast for the economy to contract by 6.2 percent this year, up from an earlier forecast of 4.0 percent, and expects growth in 2021 of 4 - 5 percent after growth of 7.6 percent in 2019.


Tuesday, September 15, 2020

Mongolia cuts rate 3rd time in 2020 to support recovery

    Mongolia's central bank cut its policy rate for the third time this year, saying this should help it meet its inflation target, ease the economic slowdown and support the economic recovery.
    The Central Bank of Mongolia (Mongolbank) lowered its policy rate by another 100 basis points to 8.0 percent and has now cut it 300 points this year following earlier cuts in March and April.
    The bank said in a statement from Sept. 14 the rate cut was aimed at increasing the amount of loans provided by the banking sector to the  real economy and reduce interest rates, reflecting the current state of the economy and financial markets, future prospects, and uncertainties and risk in the domestic and international environment.
     Mongolia's inflation rate dropped to 2.1 percent in August from 3.4 percent in July but Mongolbank said it expects inflation to rise in coming months due to the comparison with last year though it will still remain around its current level and not exceed its target in coming years.
    Mongolbank targets inflation of 8 percent, plus/minus 2 percentage points, this year and 6 percent in the medium term.
     Mongolia's economy contracted 9.7 percent year-on-year in the second quarter, up from a 10.7 percent fall in the first quarter, the sharpest decline in economic output in 20 years.
     However, the bank said monetary and fiscal stimulus, along with a recovery of the external environment, should help the economic downturn to subside in the second half of this year before returning to "normal" in 2021.
     "Global economic activity has been volatile since the second half of this year due to the COVID-19 pandemic but is expected to improve," Mongolbank said, adding it would continue to support the liquidity of banks, households and businesses and take measures to prevent any disruption to credit in the banking system.
     On Aug. 7 the bank's monetary policy committee decided at an unscheduled meeting to extend its measures to restructure and extend the maturity of consumer loans for lenders experiencing difficulties due to the current economic circumstances to the end of this year.
     Under its original decision from April, loans for some 76,000 borrowers have been amended covering consumer loans of 663 billion tughrik.