Sunday, February 7, 2016

This week in monetary policy: Iceland, Armenia, Philippines, Sweden, Serbia, Chile, Peru, Uganda and Zambia

    This week (February 8 through February 13) central banks from 9 countries or jurisdictions are scheduled to decide on monetary policy: Iceland, Armenia, Philippines, Sweden, Serbia, Chile, Peru, Uganda and Zambia.
    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.

FEB 8-FEB 13, 2016:
COUNTRY       DATE           RATE      LATEST        YTD     1 YR AGO    MSCI
ICELAND 10-Feb 6.50% 25 0 5.25%
ARMENIA 10-Feb 8.75% -100 0 10.50%
PHILIPPINES 11-Feb 4.00% 0 0 4.00%       EM
SWEDEN 11-Feb -0.35% 0 0 -0.10%       DM
SERBIA 11-Feb 4.50% 0 0 8.00%       FM
CHILE 11-Feb 3.50% 0 0 3.00%       EM
PERU 11-Feb 4.00% 25 25 3.25%       EM
UGANDA 12-Feb 17.00% 0 0 11.00%
ZAMBIA 12-Feb 15.50% 300 0 12.50%


Friday, February 5, 2016

Emerging markets may be facing tighter liquidity - BIS

    Emerging market economies may be facing tighter liquidity conditions as cross-border lending to emerging economies, especially China, shrank in the third quarter of 2015 and U.S. dollar borrowing by non-bank companies in those economies was flat for the first time since 2009, according to the Bank for International Settlements (BIS).
    BIS General Manager Jaime Caruana said global liquidity - a term that captures the ease of financing in global financial markets -  shows that the stock of U.S. dollar-denominated debt of non-bank borrowers outside the U.S. was unchanged at $9.8 trillion from June to September and dollar borrowing by non-banks in emerging economies also was steady at $3.3 trillion.
    An even clearer sign that global liquidity conditions for emerging markets may have peaked comes from a decline in cross-border lending to China, Brazil, India, Russia and South Africa. In the third quarter of last year lending shrank by $38 billion to $824 billion from the second quarter, Caruana said in a speech at the London School of Economics (LSE).
    The shift in global financing conditions comes as growth in emerging market economies is declining, the U.S. dollar is rising against emerging market currencies, and commodity prices, especially oil, has plunged, hitting commodity producers.
    While these three headwinds may appear unconnected at first sight, Caruana said they are deeply connected and share common factors.
    "Rather than being exogenous "shocks," they are manifestations of a major realignment of economic and financial forces associated with the long-anticipated shift of global monetary forces," he said.
    Although total global debt has continued to rise since the global financial crises, the growth in emerging markets has been dramatic as compared to that of advanced economies, Caruana said.
    Since 2009 the average level of private credit in emerging economies as a proportion of Gross Domestic Product has jumped to 125 percent from around 75 percent and the debt of non-financial emerging market firms as a proportion of GDP has grown so fast that it exceeds that of advanced economies.
    Companies that produce commodities as well as non-tradable goods were attracted to a relatively weak U.S. dollar and low interest rates since 2009 and as a rule of thumb, 1 percent depreciation of the dollar has been associated with a 0.6 percentage point increase in the quarterly growth of dollar-denominated cross-border lending outside the U.S. 
    The increased leverage facing companies in emerging markets would be less of a concern if the debt had been used to finance productive investments that eventually boost profits.
    "However, the profitability of EME non-financial companies has fallen," Caruana said, noting that traditionally they had been more profitable than their peers in advanced economies but their profitability has been falling in recent years and is now below that of advanced economies.
    Although many firms in emerging markets have dollar cash flows to help service debt and much of the debt has maturities of over 10 years, Caruana said the challenges of deleveraging and a depreciation of the local currency should not be underestimated.
    "The feedback loop has started to impact the broader economy in EMEs now that the dollar has started to appreciated, " he said.
    And while many emerging markets economies now have large foreign exchange reserves in contrast to the crises in the 1980s and 1990s, Caruana said this may not necessarily prevent slower growth as there is no real mechanism for transferring foreign exchange reserves to private firms with dollar debts, which end up curtailing their operations as they reduce leverage.
    The impact of the fall in commodity prices has not only hit oil producers in emerging economies but also U.S. shale producers, with both types of firms borrowing heavily from both banks and markets against oil reserves and projected revenue.
    The value of outstanding bonds from oil and gas companies rocketed to $1.4 trillion in 2014 from $455 billion in 2006 and syndicated loans amounted to $1.6 trillion in 2014, up from $600 billion in 2006.
    A large part of the borrowing was from state-owned oil companies in emerging markets whose firms paid large dividends to their governments, helping finance spending.
    "As with any leveraged sector, the combination of falling oil prices and higher leverage can lead to financial strains for oil-related firms," Caruana said.

    Click to read Caruana's speech "Credit, commodities and currencies."


Romania maintains rate, inflation in target band 2017

    Romania's central bank left its monetary policy rate steady at 1.75 percent as the latest quarterly inflation forecast sees inflation re-entering the variation band around the target at the start of 2017 and remaining there after slipping deeper into negative territory from January through May this year due to the cut in Value Added Taxes in June 2015.
    The National Bank of Romania (NBR), which cut its rate by 350 basis points and the reserve requirement on foreign exchange liabilities in January, added that inflation is expected to remain within the target variation band of 1.5 to 3.5 percent from 2017 due to a fading of the impact of the VAT rate cuts, an easing of the fiscal policy stance and the rise in wage costs.
    Romania has cut its VAT rate in two steps, initially in June 2015 and then to 20 percent from 24 percent as of Jan. 1, 2016, and the February inflation report will be published on Feb. 9.
    In December Romania's headline inflation rate was minus 0.9 percent, higher than minus 1.1 percent in November and the highest since consumer prices started falling in June. The gradual rise in inflation in recent months was attributed to the base effects from fuel price movements, a faster pick-up in tobacco prices and the relative weakening of the leu currency.
    In its November inflation report, the central bank forecast that headline inflation would hit minus 0.7 percent at the end of 2015 and then turn positive by the end of this year at 1.1 percent before returning to the variation band.
    Excluding the impact of the reduced VAT rate, the NBR said annual inflation would have neared 2 percent at the end of 2015, within its variation band around the midpoint target of 2.5 percent. In November the central bank had forecast headline inflation of 2.1 percent end-2015 and 2.7 percent end-2016.

Thursday, February 4, 2016

Mexico holds rate but risks rising, watching peso

    Mexico's central bank left its benchmark target for the overnight interest rate steady at 3.25 percent as inflation is expected to converge to the bank's target but warned that the economic situation had changed in an unfavorable manner and risks had risen so it was closely monitoring inflationary expectations, especially the exchange rate and how it affects consumer prices.
    The Bank of Mexico, which in December raised its rate by 25 basis points in the wake of the U.S. Federal Reserve's hike, added that it was especially watching the relative position between the U.S. and Mexico in order to take flexible measures when conditions warrant.
    The central bank noted that the the balance of risks to global growth and inflation had worsened since December as the global economy was continuing to weaken and one could not rule out that emerging economies with greater vulnerabilities could "face a messy financial adjustment process."
    This also meant that Mexico's peso had depreciated against the U.S. dollar after the Federal Reserve maintained its rate in January and looking ahead it cannot be "ruled out that international financial volatility will remain high or even increase," the central bank said.
    The peso was trading at 18.28 to the U.S. dollar today, down from 17.2 at the start of this year with the central bank on Tuesday saying that it had twice sold $200 million at two auctions after the peso fell more than 1 percent from its fix in the previous session and then fell another 1.5 percent.
    Mexico's economy was still showing sustained growth in the fourth quarter of last year, helped by higher wages, but the bank said manufacturing exports were stagnant and it growth in output in the fourth quarter was moderately lower than in the third quarter.
    Mexico's Gross Domestic Product expanded by an annual 2.5 percent in the fourth quarter, slightly below 2.6 percent in the third quarter.
    Mexico's inflation rate eased in December to a 2015-low of 2.13 percent, down from November's 2.21 percent but data for the first half of January show a rise to 2.48 percent due to the comparison of the cut in the cost of telephone services in January 2015.
    The central bank expects that both headline and core inflation will end this year close to 3.0 percent and then stabilize around that level in 2017.
    The central bank targets 3.0 percent inflation, plus/minus 1 percentage point.


Czechs to use FX tool until H1 2017, mull negative rates

    The central bank of the Czech Republic left its benchmark two-week repo rate steady at 0.05 percent but firmed up its commitment about using currency markets as tool of monetary policy, saying it "will not discontinue the use of the exchange rate as a monetary policy instrument before 2017" and considers "it likely that the commitment will be discontinued in the first half of next year.
   The Czech National Bank (CNB) has been keeping a cap on the exchange rate of its koruna currency as a tool to ease monetary conditions since November 2013 but in December it said it was likely to stop using the exchange rate as a tool around the end of 2016.
   In addition to extending its commitment to keep down the koruna, the CNB said its board had "again also discussed the possibility of introducing negative interest rates in light of the widening of the interest rate differential vis-a-vis the euro area and developments in domestic financial markets."
    In its new economic forecast, the CNB lowered its predictions for inflation due to the fall in inflation at then end of 2015, a subdued outlook for foreign producer prices and the drop in oil.
    The CNB forecast in November that Brent oil would average US$54.5 per barrel in 2016 but now forecasts $35.9. For 2017 the forecast for oil was cut to $42.8 from $58.7.
    Consumer prices are now seen rising by 2.0 percent in the first quarter of 2017 and 2.1 percent in the second quarter of 2017, below the previous forecast of 2.2 percent and 2.2 percent, respectively.
    Inflation in December was steady from November at 0.1 percent.
    Economic growth in 2015 was still seen at 4.7 percent but then dropping to 2.7 percent this year, down from the previous forecast of 2.8 percent, before rising to 3.0 percent in 2017, above the past forecast of 2.9 percent.
    In the third quarter of last year the economy of the Czech Republic grew by an annual 4.7 percent, up from 4.6 percent in the second quarter and 4.1 percent in the first quarter.

BOE keeps rate in unanimous vote as inflation view cut

    The Bank of England (BOE) left its benchmark Bank Rate steady at 0.5 percent, as widely expected, but lowered its forecast for inflation, economic growth and the bank rate due to the fall in crude oil prices and slower growth in emerging market economies.
    The decision by the BOE's 9-member monetary policy committee was unanimous as member Ian McCafferty for the first time since August reversed his view and voted with his colleagues. In the previous five meetings, McCafferty had voted to raise the rate by 25 basis points, arguing that inflation will exceed the BOE's 2.0 percent target.
    But the prospects for accelerating inflation have dimmed as wage growth has been weaker than expected and labor costs are likely to rise slower than previously expected as low inflation moderates future upward pressure on wages.
    "As one of the most open economies in the world, the UK cannot help but be affected by an unforgiving global environment and sustained financial market turbulence, BOE Governor Mark Carney said in his prepared statement.
    In its latest inflation report, the BOE cut its forecast for consumer price inflation to average 0.4 percent in the first quarter of this year, down from November's forecast of 0.7 percent, and to 1.2 percent for the first quarter of 2017 from 1.5 percent.
    By the first quarter of 2018 the BOE expects inflation to average 2.1 percent, above its target, as the past falls in energy prices drops out of comparison and the recent fall in the exchange rate of the pound and lower market rates supports higher wages.
    In December UK inflation rose slightly to 0.2 percent from 0.1 percent in November as deflation of 0.1 percent in September and October was reversed.
    As a consequence of lower inflation, the BOE now expects its bank rate to rise slower than expected. By the first quarter of 2017 the bank rate is expected to remain at the current 0.5 percent, down from the November's forecast of 0.7 percent, before rising to 0.8 percent in Q1 2018, down from 1.1 percent previously seen, and then reach 1.1 percent in first quarter of 2019.
    Although Carney said domestic demand in the UK remained resilient, with robust consumer confidence, rising income and firm investment intentions, a sharp retrenchment in capital spending in the oil and gas sector is underway and deteriorating prospects for emerging market economies pose downside risks to the UK and exports are seen dragging down UK growth.
    Economic growth in the United Kingdom is now expected to average 2.5 percent in 2015, down from the previous projection of 2.7 percent, then ease to 2.2 percent this year, down from 2.5 percent previously seen, before rising to 2.4 percent in 2017 and 2.5 percent in 2018.
    Gross Domestic Product in the UK rose by an annual rate of 1.9 percent in the fourth quarter of 2015, the lowest annual rate in almost 3 years.
    The recent fall in financial markets reflects the prospects of slower global growth, especially in emerging market economies such as China, along with the news about the supply of oil and the risks to the BOE's growth forecasts remain to the downside.
    However, low commodity prices and fiscal and monetary policy should continue to boost income in the UK and its main trading partners and the BOE still expects rising domestic demand to eliminate the limited margin of spare production capacity during this year.

Wednesday, February 3, 2016

Albania holds rate, easy money conditions next 2 years

    Albania's central bank left its policy rate steady at 1.75 percent, saying that it doesn't expect "the intensity of the monetary stimulus" to weaken this year and monetary conditions to remain accommodative in the next two years.
    The Bank of Albania, which cut its rate by 50 basis points in 2015, also said its accommodative stance had brought market interest rates to historic minimums and it expects rates to remain below their historic average over the next two years.
    In contrast to his statement in December, Governor Gent Sejko today dropped his guidance that the central bank "stands ready to take all the necessary measures" to reach its objectives.
    Sejko said Albania's economy is forecast to expand in the next three years and return to equilibrium in the first quarter of 2017, and inflation is expected to return to the bank's 3.0 percent target in the second quarter of 2018, averaging around 2 percent in 2016.
    One of the reasons for the increased monetary stimulus through lower market rates - even beyond the central bank's signals - was the issue of a euro bond that reduced public borrowing in domestic markets. The impact of this is expected to remain over the next two years, Sejko said.
    Another reason for the stimulus is the plan to reduce non-performing bank loans that will help ease credit standards and increase the supply of bank credit.
    "In view of the above arguments, economic growth will further improve in the medium-term horizon, fed initially by the domestic demand and later by the steady growth of exports," Sejko said.
    Albania's economy grew by an annual 2.98 percent in the third quarter of 2015, up from 2.96 percent in the second quarter, with growth in the second half on the higher side of expectations.
    Inflation in December eased to 2.0 percent from 2.1 percent in November.

Poland maintains rate, sees rising core inflation

    Poland's central bank left its reference rate steady at 1.50 percent, as expected, saying inflation will remain negative in coming months due to "depressed prices of global energy commodities" but core inflation should gradually rise, supported by stable economic growth amid improving economic activity in the euro area and favorable labor market conditions.
    The National Bank of Poland (NBP), which cut its rate by 50 basis points in 2015, added that a more comprehensive assessment of the outlook for inflation and growth will be possible after the monetary policy council sees the March inflation and growth forecast.
    At their previous meeting in January, some members of the bank's monetary policy council called for a rate increase in coming months while others said rate cuts should be considered because growth in domestic demand is slow and consumer prices depressed.
    Eight of the council's 10 members are due to leave office by the end of February as terms expire.
    In its November forecast, the central bank estimated deflation of minus 0.9-0.8 in 2015 and inflation of 0.4-1.8 percent in 2016.
    Poland's headline inflation rate declined by an annual 0.5 percent in December, up from minus 0.6 percent in November while core inflation eased to 0.23 percent from 0.25 percent.
    The NBP, which targets inflation of 2.50 percent, plus/minus 1.0 percentage point, said there were no inflationary pressures due to the negative output gap and moderate wage growth, and inflation expectations remain very low.
    "However, the persisting deflation has not yet adversely affected decisions of economic agents," it said.
    In its last forecast, the central bank estimated 2015 economic growth of 2.9-3.9 percent and forecast growth of 2.3 to 4.3 percent for 2016.
    In the third quarter of 2015, Poland's Gross Domestic Product grew 0.9 percent from the second quarter and the central bank said estimates suggest that growth rose in the fourth quarter, as domestic demand, helped by stable consumption and rising investment, drove growth.
    The government's statistical office has estimated real GDP growth in 2015 of 3.6 percent compared with 3.3 percent in 2014.
    Last month ratings agency Standard & Poor's surprisingly cut Poland's credit rating, arguing that the new conservative government had weakened the independence of key institutions.
    S&P also said it could lower the rating again if the independence of institutions like the central bank was further weakened.

Georgia holds rate, sees no need for further tightening

    Georgia's central bank left its benchmark refinancing rate unchanged at 8.0 percent, saying it doesn't see any need for additional monetary tightening to contain inflation expectations, barring additional shocks, following last year's rate increases.
    The National Bank of Georgia (NBG), which last year raised its rate by 400 basis points, added that its tightening was being reflected in the economy with interest rates on lari-denominated loans rising and a decline in the growth of credit so demand will weaken further and push down inflation.
    "Further changes in monetary policy will depend on the inflation forecast and factors affecting it, global and regional economic environment and general economic conditions," said the NBG.
    The decision to maintain rates today follows the guidance by the central bank in December, when it raised the rate by 50 basis points but also said that further tightening was not to be expected and the increase in inflation from past depreciation of the lari's exchange rate was exhausted.
    Georgia's inflation rate rose slightly to 5.6 percent in January from 4.9 percent in December, pushed up by an increase in electricity tariffs.
    The central bank expects inflation to slightly exceed its target at the beginning of 2016 but then decline below 5 percent and staying close to its 5.0 percent target.
    The lari started tumbling in November 2014 - it fell 22 percent against the U.S. dollar in 2015 -  and has continued to decline this year, albeit at a slower pace. Today the lari was trading at 2.49 to the dollar, down 3.6 percent since the start of this year.
   The fall in the exchange rate has affected imports, which fell by 15.3 percent in 2015, the central bank said, adding that "the impact of the external shock on the exchange rate has been exhausted" and "other things being equal no additional pressure can be expected on the exchange rate coming from the existing external shock."
    Like many other former Soviet Union states, Russia is Georgia's main trading partner and its economy and currency has been dragged down by the fall in the ruble and Russia's economic crises.
    Georgia's economy was estimated to have expanded by 2.8 percent in 2015, the central bank said, with the external sector hampering growth while domestic demand was supporting it though this was also affected by the decline in remittances from abroad and higher cost of servicing debt in foreign currency loans due to the fall in the lari's exchange rate.

Thailand maintains rate, still sees inflation rising

    Thailand's central bank left its key policy rate steady at 1.50 percent, as expected, saying it still expects inflation to rise gradually and turn positive in the first half of this year despite the downside risks to inflation from the fall in global oil prices.
    The Bank of Thailand (BOT), which cut its rate by 50 basis points in 2015, also said that it expects the country's economy to expand at a rate that is similar to its forecast from December, supported by domestic demand.
   However, it added that external risks had risen from the economies of its major trading partners, shifting global trade structure, low commodity prices, and the divergence of monetary policy among advanced economies continues to affect capital flows and exchange rate movements.
    In December the BOT lowered its forecast for 2016 headline inflation to 0.8 percent from a previous 1.2 percent due to the fall in global oil prices, but it considers deflationary risks to be contained as domestic demand continues to recover, core inflation is positive and inflation expectations remains close to the bank's target of 2.5 percent, plus/minus 1.5 percentage point.
    Thai consumer prices fell by 0.53 percent in January, down from a 0.85 percent fall in December for the 13th month in a row of deflation. The BOT estimated annual deflation of 0.9 percent in 2015.
    Thailand's Gross Domestic Product expanded by 1.0 percent in the third quarter of 2015 from the second quarter for annual growth of 2.9 percent, marginally up from 2.8 percent in the second quarter but down from 3.0 percent in the first quarter.
    Thailand's economy is being supported by high public spending, an improving number of tourists, especially from China, and a continued rise in private consumption on the back of the government's tax rebate and accelerated car purchases ahead of an increase in vehicle taxes at the start of 2016.
    In contrast, the BOT said merchandise exports had contracted "markedly."
    In December the BOT slashed its forecast for exports to stagnate in 2015 after previously expecting they would expand by 0.6 percent following zero percent growth in 2014.
    For 2016 the BOT lowered its forecast for exports to grow by 2.1 percent from September's forecast of 3.3 percent growth.
    For 2016 economic growth, the BOT lowered its forecast to 3.5 percent from a previous 3.7 percent due to lower-than-expected foreign demand, particularly from China and other Asian economies.
    But for 2015 the BOT raised its forecast to 2.8 percent from 2.7 percent due to higher-than-expected private consumption and public investment.
    The BOT still considers its monetary policy stance to be accommodative and that this should remain the case while still keeping in mind the risks to financial stability.

Monday, February 1, 2016

India holds rate, monetary policy still accommodative

    India's central bank left its benchmark repo rate steady at 6.75 percent, as expected, saying the current growth momentum is "reasonable," albeit lower than it should be over the medium term, and the monetary policy stance is still accommodative while waiting for further news on inflation.
    The Reserve Bank of India (RBI), which last year cut its rate by 125 basis points, added that structural reforms that boost growth while controlling spending will create more space for monetary policy to support growth while still ensuring that inflation remains on its projected path of 5 percent by the end of 2016-17.
    The guidance by the RBI is more neutral than in November when it said that it would use the space for further rate cuts when available while keeping the economy on its disinflation path.
     RBI Governor Raghuram Rajan said private investment needs to be revived and plays a crucial rose in putting the economy on a higher growth trajectory at a time of consolidating business climate and fiscal policy.
   "The Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude," Rajan said, adding this needs to be maintained to strengthen the foundations of stable and sustainable growth.
    India's economy lost some momentum in the third quarter of the 2015-16 fiscal year, or the fourth quarter of calendar 2015, pulled down by slackening agricultural and industrial growth, Rajan said, adding RBI's industrial outlook suggests a modest expansion in the fourth fiscal quarter.
   India's Gross Domestic Product expanded by 1.9 percent in the third 2015 quarter from the second quarter for year-on-year growth of 7.4 percent, up from 7.1 percent in the second.
    India's consumer price inflation rate accelerated for the fifth consecutive month in December, rising to 5.61 percent from 5.41 percent in November and a 2015-low of 3.69 percent in July, but Rajan said the rise reflected unfavorable base effects and a seasonal fall in fruits and vegetables could temper inflation in the near term.
     In general, inflation has evolved closely along the RBI's expectation and Rajan expects the target of 6 percent in January 2016 should be met.
    Under the assumption of a normal monsoon and the current level of crude oil prices and exchange rates, he added that inflation should be around 5 percent by the end of fiscal 2016-17.
    India's rupee has been depreciating since the "taper tantrum" of May 2014 and fell by 4.7 percent against the U.S. dollar last year. This year it has continued to ease, quoted around 67.9 to the dollar today, down 2.5 percent so far this year.