Friday, December 14, 2018

Russia raises rate 25 bps in proactive move as prices rise

     Russia's central bank raised its key rate by 25 basis points to 7.75 percent in what it described as a proactive move that was "aimed at limiting inflation risks that remain elevated, especially over the short-term horizon."
     It is the second rate hike by the Bank of Russia this year and was expected by many as the central bank warned in October it would consider further tightening due to the risks posed by external conditions that were weakening the ruble along while consumer prices were already beginning to reflect a rise in value-added taxes (VAT) to 20 percent from 18 percent on Jan. 1, 2019.
     "The increase in the key rate will help firm inflation anchoring at the level significantly exceeding the Bank of Russia's target," the central bank said, reiterating its guidance that it will "consider the necessity of further increases in the key rate."
     The Bank of Russia cut its rate by a total of 9.75 percentage points from January 2015 until April this year when the ruble tumbled, boosting import prices and thus inflation, in response to fresh sanctions by the United States.
     In September this year the central bank then surprised many economists by raising its rate by 25 basis points and raised its inflation forecast as inflation expectations were starting to pick up in light of the lower ruble, higher food prices and the expected impact of the VAT increase.
     Today the Bank of Russia confirmed that it expects inflation to rise to 5.0 - 5.5 percent by the end of 2019 before returning to the bank's 4.0 percent target in 2020.
      The VAT hike and the weaker ruble are expected to trigger a temporary acceleration in inflation in the first half of next year but then slow to around 4.0 percent in the second half and settle around 4.0 percent in the first half of 2020 when the impact of the weaker ruble and VAT peters out.
      Russia's inflation rate rose to a 2018-high of 3.8 percent in November from 3.5 percent in October and the central bank expects inflation of 3.9 to 4.2 percent by the end of the year.
     As in most of the world, economic activity slowed in the third quarter but the central bank said it was still expecting growth this year to average 1.5 to 2.0 percent and confirmed its forecast for growth in 2019 of 1.2 to 1.7 percent, with growth in following years benefitting from structural reform measures being implemented.
      Growth in the third quarter slowed to 1.5 percent year-on-year from 1.9 percent in the second quarter.
     Russia's ruble fell in April and in August but has been largely steady in recent months. Today it was trading around 66.6 to the U.S. dollar, down 13 percent this year.

Thursday, December 13, 2018

Mozambique cuts rate 9th time as inflation decelerates

      Mozambique's central bank lowered its monetary policy rate for the ninth time as inflation continues to decelerate, the economy slowly recovers and the exchange rate slowly depreciates.
     The Bank of Mozambique cut its monetary policy rate (MIMO) by another 75 basis points to 14.25 percent and has now cut it by 900 basis points since April 2017, including 525 points this year.
      In addition to cutting MIMO, the central bank said its CPMO, the bank's body responsible for monetary policy, also lowered the deposit rate and the marginal lending facility rate by 75 basis points to 11.25 percent and 17.25 percent, respectively.
      However, the reserve requirements for banks' foreign and domestic currency liabilities were maintained at 27.0 percent and 14.0 percent, respectively.
      CPMO said the decision to resume the downward trend in the key rate was based on the outlook for short and medium-term inflation to remain in single digits.
      Mozambique's headline inflation rate eased to 4.27 percent in November from 4.75 percent in October, despite higher administered prices, while the metical was steady in response to the rate cut, trading at 61.6 to the U.S. dollar, down 4.4 percent this year.
      Mozambique's economy, which was dealt several severe blows in recent years, is continuing to slowly recover, supported by the government's commitment to tight monetary and fiscal policies, and reforms to improve the business environment, governance and transparency.
      In the third quarter of this year the country's gross domestic product grew by an annual 3.2 percent, down from 3.3 percent in the second quarter.
      On top of a decline in global commodity prices in 2014 and 2015, foreign donors, including the IMF, withdraw funding to Mozambique in 2016 when it was discovered the government hid almost $1.4 billion of debt, the equivalent of 10 percent of GDP.
       Following a visit last month by the IMF to initiate talks on cooperation next year, the IMF said the outlook for 2019 was for continued economic recovery and subdued inflation, with growth in a range of 4.0 to 4.7 percent, supported by monetary easing, clearing of domestic payment arrears to suppliers and higher foreign direct investment, particularly in liquified natural gas projects.
       Forecasting inflation of around 6 percent next year, the IMF said there was room for further monetary easing but that this should be done carefully given uncertainties in the global economy.

ECB ends asset purchases, steady rates till mid-2019

     The European Central Bank (ECB) left its key interest rates unchanged and confirmed that it will slowly return to an era of more normal monetary policy by ending its purchases of assets, known as quantitative easing, this month despite a slight downgrade in growth and inflation forecasts
      The ECB, which has accumulated some 2.6 trillion euros of assets since 2015 to keep down interest rates and boost economic activity, also confirmed its guidance since June that it expects to maintain key interest rates - including the main refinancing rate which has been at zero percent since March 2016 - "at least through the summer of 2019."
       But although the end of quantitative easing and the monthly purchase of 15 billion euros of assets wraps up this month, the ECB want to keep long-term interest rates low to boost inflation by reinvesting principal payments from maturing bonds "for an extended period of time past the date when it starts raising the key ECB interest rates."
      "Significant monetary stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term," Draghi said, confirming the ECB remains ready to adjust any of its instruments to ensure inflation meets its target.
      The end of what the ECB described as "non-standard monetary policy measures" comes against the backdrop of weaker than expected economic growth with the risks to the outlook moving to the downside - though still balanced - due to "the threat of protectionism, vulnerabilities in emerging markets and financial market volatility," Draghi said.
      Nevertheless, the ECB remains confident economic growth will recover in the near term, supported by a recovery of car manufacturing, and only lowered its 2019 growth forecast for the 19 European countries that use the euro currency to 1.7 percent from September's forecast of 1.8 percent.
      Reflecting the sharp fall in third quarter growth - 1.6 percent from 2.4 percent in the second quarter - the ECB lowered its 2018 growth estimate to 1.9 percent from 2.0 percent.
       For 2020 the ECB expects growth to remain steady from next year at 1.7 percent before easing to 1.5 percent in 2021.
      Inflation, which has been hovering around the ECB's target of below, but close to 2.0 percent in recent months, dipped in November to 2.0 percent from 2.2 percent on lower oil prices and is expected to decline further in coming months as oil prices remain in check.
      Although inflation remains muted, the ECB still expects underlying inflation to rise due to rising costs from economic growth that tightens labour markets pulls up wages.
      The ECB raised its forecast for inflation to average 1.8 percent this year, up from a previous 1.7 percent, but lowered its 2019 forecast to 1.6 percent from 1.7 percent. In 2020 inflation is seen at 1.7 percent and then 1.8 percent in 2021.

Norway holds rate, confirms March hike but growth lower

     Norway's central bank left its policy rate steady at 0.75 percent, as expected, and confirmed the policy rate will "most likely" be raised in March next year to 1.0 percent followed by a gradual rise to 2.0 percent by the end of 2021.
     But Norges Bank (NB), which in September raised its rate by 25 basis points for the first time in seven years, also said the recent decline in oil prices and weaker global growth prospects imply a slightly lower path of rate hikes in 2020 and 2021.
     "Overall, the outlook and the balance of risks imply a gradual interest rate increase in years ahead," NB said, adding if the policy rate were kept at the current level for a long time, price and wage inflation may accelerate, leading to rapid rate hikes that would then stifle an economic upturn.
      In its latest monetary policy report, NB forecast the policy rate - or the rate of return that banks receive on deposits with the central bank - would average 1.0 percent next year and then 1.4 percent in 2020 and 1.8 percent in 2021.
      This rate path implies one rate hike in 2019, two hikes in 2020 and another two in 2021.
      "Our current assessment of the outlook and the balance of risks suggest that the policy rate will most likely be raised in March 2019," NB Governor Oeystein Olsen said.
      NB's forecast for the average policy rate in 2019 is unchanged from the previous policy report in September, but for 2020 and 2021 the latest forecast was cut by 0.1 percentage points.
      Norway's economy has been growing solidly since the fall of 2016 but slowed more than expected in the third quarter of this year on lower agricultural production after a dry summer.
      Slower global growth and the decline in oil prices will tend to reduce the profits of the oil industry lower growth in coming years but the central bank said there were still prospects for solid growth in investments in the coming year.
      Norways economy grew by an annual rate of 1.1 percent in the third quarter of this year, down from 3.4 percent in the second quarter and NB lowered its 2018 growth forecast for the mainland economy by 0.1 percentage point to 2.4 percent.
      For 2019 NB projects average growth in gross domestic product of 2.3 percent, down from 2.5 percent forecast in September, growth of 1.6 percent in 2020, down from 1.8 percent, and 1.4 percent in 2021, up from 1.2 percent.
      Inflation, on the other hand, has risen in the past year, boosted by higher electricity prices, and higher wages. A weaker-than-expected Norwegian krone has also underpinned rising inflation.
      However, NB also said the growth in wages had been slightly lower than expected and the fall in oil prices suggest easier wage growth.
      Norways' consumer price inflation rate rose to a 2018 high of 3.5 percent in November, well above the central bank's recently-lowered 2.0 percent target, and NB raised its forecast for inflation to average 1.8 percent in 2019, up from 1.3 percent.
      For 2018 headline inflation is seen averaging an unchanged 2.7 percent while inflation excluding taxes and energy product was seen at 1.5 percent, up from 1.4 percent.
      For 2020 NB forecast headline inflation of 1.6 percent, up by 0.2 percentage points from its September forecast, and 1.7 percent inflation in 2021, down from 1.8 percent.

Wednesday, December 12, 2018

Moldova holds rate steady under new governor Armasu

      Moldova's central bank kept its base rate steady at 6.50 percent, saying the risk of low inflation in 2019 and 2020 remains intact due to more moderate global oil and food prices than forecast in the November inflation report.
     The National Bank of Moldova (NBM), which has maintained its rate since December 2017, also said there is a risk inflation may be lower than expected in the next two quarters due to a high supply of some crops while the assumptions for the rest of the forecast horizon are unchanged.
     Balancing the downside risks to inflation, NBM pointed to the exchange rate of the leu that is likely to generate inflationary pressures
     Moldova's inflation rate fell to 0.9 percent in November from 1.2 percent in October, the lowest inflation rate since December 2009.
      In its November inflation report the central bank forecast inflation in the first two quarters would be below its target range of 5.0 percent, plus/minus 1.5 percentage points, but then rise to the upper end of its range by the end of next year. In early 2020 inflation would then decelerate.
     It was NBM's first monetary policy decision under the leadership of former Finance Minister Octavian Armasu who took over as governor on Nov. 30 for a 7-year term following the resignation of Sergiu Cioclea.
     Cioclea became governor in 2016, replacing Dorin Dragutanu who resigned after a $1 billion embezzlement scandal that led to major street demonstrations, a plunge in the leu and soaring inflation, and aid from the European Union and the International Monetary Fund.
     Under Cioclea, the central bank improved transparency in bank ownership and guided the sale of stakes in large lenders to foreign investors.
     When he announced his resignation, Cioclea said this was for personal reasons and that he had fulfilled his mission.
     After plunging in 2015, the leu turned around in May 2016 and appreciated steadily until August. Since then it has traded sideways against the euro and was quoted at 19.5 today, up 5 percent this year.

Georgia maintains rate, still sees gradual easing

    Georgia's central bank kept its benchmark refinancing rate at 7.0 percent, expecting inflation to fluctuate around the target, and said the speed of the planned easing of monetary policy depends on how fast the output gap closes and how strongly the recent rise in regional macroeconomic risks are transmitted to the country's economy.
    The National Bank of Georgia (NBG), which has maintained its rate since July when it began a gradual easing by cutting the rate by 25 basis points, reiterated the process of normalizing its policy would be slow and inflation is still not affected by the possible transmission of regional risks.
     Georgia's inflation rate decelerated to a 2018-low of 1.9 percent in November from 2.3 percent in October and NBG confirmed it expects inflation to remain around its 3.0 percent target.
     Georgia's economy has been expanding strongly since early 2017 and in the second quarter of this year gross domestic product grew an annual 5.5 percent, up from 5.3 percent in the first quarter and the fastest rate of growth since third quarter of 2014.
     The central bank said positive trends in the external sector were continuing, with growth in exports up 25 percent year-on-year in the first 10 months of the year, tourism revenue up 20 percent and remittances from abroad up around 16 percent.
     "In the recent months leading indicators have been pointed to the acceleration in economic growth," NBG said.
      In October the International Monetary Fund (IMF) completed its third successful review of Georgia's reform program which is expected to result in the release of another US$41.6 million, bringing total funds to $166.4 million.
      While the IMF said the country's reform program was advancing well, it noted that economic growth was softening in Georgia's main trading partners and lowered its 2018 growth forecast to 5.0 percent from 5.5 percent and forecast 2019 growth of 4.6 percent.
      The NBG's monetary policy stance was "adequate," IMF said, adding inflation was expected to remain in line with the target and a flexible exchange rate was "pivotal to protect Georgia against external risks."
      Georgia's lari fell sharply late last year until a rate hike in December stopped the decline and reversed it, pushing up the exchange rate until April this year. Since then the lari has eased against the U.S. dollar, in line with most other currencies though it has firmed in the last month.
     Today the lari was trading at 2.66 to the dollar, down 1.9 percent this year.

Iceland holds rate, to prevent krona fall, ready to tighten

    Iceland's central bank left its key interest rate unchanged at 4.50 percent and while it reiterated that it would intervene to prevent a drop in the Icelandic krona from the government's plan to lift capital controls it also said it would tighten its monetary policy stance if inflation expectations continue to rise.
    The Central Bank of Iceland (CBI) last month raised its rate for the first time since November 2015 to curb rising inflation from strong economic growth and a fall in the krona.
     Despite a jump in November inflation to 3.3 percent from 2.8 percent in October, CBI said this rise was expected and while there are signs the positive output gap will continue to narrow, the rise in inflation expectations was still limited to short-term expectations and the fall in the krona has slowed.
    "The near-term monetary stance will depend on the interaction between a narrower output gap, wage-setting decisions, and developments in inflation and inflation expectations," CBI said.
     Iceland's economy slowed in the third quarter - zero percent growth from the second quarter and 2.6 percent annual growth - but expanded by 5 percent in the first nine months, slightly higher than forecast by CBI in November.
     Lasts month CBI raised its forecast for 2018 growth to 4.4 percent but maintained its forecast for growth to ease in 2019 to 2.7 percent and then slow further to 2.5 percent in 2020.
     Iceland's krona fell sharply from April through November but it has firmed in recent weeks and rose slightly in response to the central bank's decision. The krona was trading at 123.4 to the U.S. dollar, down 16 percent this year.
     On Friday Iceland's government proposed to the parliament that owners of offshore krona will be allowed to either close out their positions in full by swapping them for foreign currency in the onshore market or hold them as unrestricted krona assets in cases that involved continuous ownership from the time before the capital controls were imposed in the wake of the global financial crises.
     In addition, the government is preparing to sell its stake in two of the banks that were reestablished with domestic assets following the 2008 bankruptcy of their parent banks that failed during the financial crises.

Saturday, December 8, 2018

This week in monetary policy: Iceland, Georgia, Moldova, Brazil, Fiji, Philippines, Switzerland, Norway, Turkey, ECB, Ukraine, Malawi, Mozambique, Peru & Russia

    This week - December 9 through December 15 - central banks from 15 countries or jurisdictions are scheduled to decide on monetary policy: Iceland, Georgia, Moldova, Brazil, Fiji, Philippines, Switzerland, Norway, Turkey, euro area, Ukraine, Malawi, Mozambique, Peru and Russia.
    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, the rate one year ago, and the country’s MSCI classification.
    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

DEC 9 - DEC 15, 2018:
COUNTRY                   DATE                     RATE                LATEST                    YTD              1 YR AGO
EURO AREA13-Dec0.00%000.00%

Thursday, December 6, 2018

Serbia maintains rate, confirms 3.0% inflation target

     Serbia's central bank left its key policy rate at 3.0 percent and the executive board set the inflation target until 2021 at an unchanged 3.0 percent, plus/minus 1.5 percentage points.
      The National Bank of Serbia (NBS), which has maintained its rate since wrapping up a 5-year easing cycle in April this year, said it was still cautious in the conduct of monetary policy due to the international environment while domestic inflationary pressures remain low amid the strongest economic growth in a decade.
      Serbia's inflation rate rose slightly to 2.2 percent in October from 2.1 percent in September but within the target range and is expected to remain stable, mainly reflecting a steady rise in demand.
     Both the financial and corporate sectors expect price stability to be maintained, signaled by inflation expectations that are anchored around the 3.0 percent target one and two years ahead.
     Serbia's economy grew by an annual rate of 3.8 percent in the third quarter, down from 4.9 percent in the second quarter, with cumulative growth of 4.5 percent year-on-year in the first three quarters, the highest rate in the last 10 years, helped by past monetary easing, NBS said.
     Between May 2013 and April this year NBS cut its key rate by 8.75 percentage points and economic activity has been boosted by double-digit growth in investments that will continue to spur manufacturing exports in the future.
     There is also a continued net inflow of foreign direct investment, NBS said, helping comfortably cover the current account deficit and reducing external balances in the medium term, NBS said.
     Serbia's dinar has been relatively stable against the euro this year, helped by occasional purchases of euros to prevent it from rising. The NBS operates a managed float exchange rate regime.
     The dinar was trading at 118.17 to the euro today, marginally firmer than 118.9 at the start of the year.

Wednesday, December 5, 2018

Uganda keeps rate steady on improved inflation outlook

      Uganda's central bank kept its Central Bank Rate (CBR) at 10.0 percent, saying the outlook for inflation has improved slightly though risks to the outlook remain elevated.
      The Bank of Uganda (BoU), which raised its rate by 100 basis points in October in what it described as a "modest" tightening of monetary policy, added that economic activity is projected to continue to expand, supported by accommodative monetary policy, with growth in the 2018/19 financial year, which began July 1, above the previous projection of 6.0 percent.
      Uganda's economy grew an annual 7-8 percent in the first 10 months of this year, according to the central bank's index of economic activity, with growth in coming years helped by a rebound in private sector credit, public infrastructure investment and improved agricultural productivity.
      "The Medium-Term Fiscal Framework indicates that public investment should remain at a high level, which should, in turn, continue to have positive spill over effects on private sector investment activity and spending," BoU said.
      Inflation in Uganda is subdued, with headline inflation of 3.0 percent in October and November, and BoU said it expects core and headline inflation to peak at 6.0 - 6.5 percent and 5.1 percent in the second half of 2019, down from a previous forecast by 1.0 and 0.7 percentage points, respectively.
      In the medium-term, the BoU expects inflation to converge to its target of 5.0 percent, adding that upside risks to this outlook stems from food crop prices, the exchange rate and demand pressures from the positive output gap.
      Uganda's shilling, which fell sharply in May and June, has been rising in the last two months and was trading at 3,733 to the U.S. dollar today, down 2.7 percent this year.

Canada holds rate, sees lower than expected inflation

     Canada's central bank kept its benchmark target for the overnight rate steady at 1.75 percent and while it expects to raise the rate further it said inflation would be lower than forecast in coming months and there appears to be additional room for the economy to expand without higher inflation.
      The Bank of Canada (BOC), which in October raised its rate for the fifth time since beginning a tightening cycle in July 2017, also said there were signs of less economic momentum in the current quarter as activity in the country's energy sector "will likely be materially weaker than expected."
      "Weighing all of these developments, Governing Council continues to judge that the policy interest rate will need to rise into a neutral range to achieve the inflation target," BOC said, adding the appropriate pace of rate hikes will depend on numerous factors, such as the impact of higher rates on consumption and housing, global trade policy, oil prices, business investment and the assessment of the country's economic capacity.
      Canada's inflation rate rose to 2.4 percent in October from 2.2 percent in the previous month - above the BOC's 2.0 percent target - while annual economic growth slowed to 1.9 percent in the second quarter from 2.3 percent in the third quarter.
      Canada's dollar, which has depreciated steadily this year, fell 0.6 percent in response to the BOC's statement to trade around 1.337 to the U.S. dollar, down 5.8 percent this year.