Monday, March 19, 2018

Kenya cuts rate 50 bps, inflation expectations anchored

      Kenya's central bank surprised financial markets by cutting its Central Bank Rate (CBR) by 50 basis points to 9.50 percent, saying there was scope to ease its monetary policy stance to boost economic activity as inflation expectations are well anchored and economic output is below its potential level.
      It is the first rate cut by the Central Bank of Kenya (CBK) since September 2016 and the bank's monetary policy committee said it would closely monitor the impact of this cut along with changes to the global and domestic economy and "stands ready to take additional measures as necessary."
       CBK said the meeting by its policy committee was held "against a backdrop of sustained macroeconomic stability, improved weather conditions, increased optimism on the economic growth prospects, improvement in the business environment, and the continued strengthening of the global economy."
      Kenya's inflation rate has been decelerating steadily in the last 12 months and fell to 4.46 percent in February from 4.83 percent in January and a 2017-high of 11.7 percent last May.
      A fall in food prices outweighed a rise in fuel prices from higher global oil prices and CBK said it expects inflation to remain within the government's target of 5.0 percent, plus/minus 2.5 percentage points, in the near term.
      The committee's private sector market perception survey from this month showed inflation was expected to decline in the near term and growth expectations for 2018 were higher.
      The exchange rate of Kenya's shilling has been firming this year on improved investor sentiment, supported by a narrower current account deficit, with the central bank expecting the deficit to narrow further to 5.4 percent of Gross Domestic Product this year from 6.4 percent in 2017.
       The shilling was trading at 101.2 to the U.S. dollar today, up 1.9 percent since the start of 2018.
       Strong growth in the export of tea and horticulture, continued income from tourism and workers abroad, has also boosted Keny's foreign exchange reserves to an all-time high of US$8.832 billion from $7.089 billion in January. 
      Together with the recently extended precautionary arrangement of $989.8 million from the International Monetary Fund, this will provide the country with additional buffers against shocks.
       Last week the IMF approved Kenya's request for a 6-month extension of its stand-by arrangement so reviews can be completed by September, with the government committing to reduce its fiscal deficit and "substantially modifying interest controls."
       In September 2016 Kenya's government imposed a cap on banks' interest rates, despite objections by the IMF and banks, arguing that lenders were not passing on low rates to borrowers.
       But the cap of 4 percent above the CBK rate has essentially dented the pass-through effect of the central bank's policy decisions and private sector credit grew by only 2.1 percent in the 12 months to February, down from 2.4 percent in December.
       However, CBK added lending to manufacturing, real estate and trade sectors remained relatively strong, up by 13.1 percent, 8.3 percent and 5.9 percent, respectively.
       Kenya's  economy has been slowing in recent quarters and expanded by only 0.4 percent in the third quarter from the second quarter for annual growth of 4.4 percent, down from 5.0 percent.
       But the CBK's survey showed "almost unanimous optimism" by the private sector about 2018 based on a stable economic environment, favorable weather, confidence, continued public investment in infrastructure, expected direct flights to the U.S. and political stability.
       Uncertainties stem from U.S. trade policies, a resolution to the UK's trading relationship with the European Union and the pace of monetary policy normalization in advanced economies, CBK said.

Sunday, March 18, 2018

This week in monetary policy: Kenya, Morocco, Chile, Colombia, USA, Brazil, Paraguay, New Zealand, Philippines, Taiwan, Indonesia, UK & Russia

     This week - March 18 through March 24 - central banks from 13 countries or jurisdictions are scheduled to decide on monetary policy: Kenya, Morocco, Chile, Colombia, USA, Brazil, Paraguay, New Zealand, Philippines, Taiwan, Indonesia, UK 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.

MAR 18 - MAR 24, 2018:
COUNTRY             DATE               RATE           LATEST              YTD            1 YR AGO       MSCI
KENYA 19-Mar 10.00% 0 0 10.00%          FM
MOROCCO 20-Mar 2.25% 0 0 2.25%          FM
CHILE 20-Mar 2.50% 0 0 3.00%          EM
COLOMBIA 20-Mar 4.50% -25 -25 7.00%          EM
UNITED STATES 21-Mar 1.50% 0 0 1.00%          DM
BRAZIL 21-Mar 6.75% -25 -25 12.25%          EM
PARAGUAY 21-Mar 5.25% 0 0 5.50%
NEW ZEALAND 22-Mar 1.75% 0 0 1.75%          DM
PHILIPPINES 22-Mar 3.00% 0 0 3.00%          EM
TAIWAN 22-Mar 1.375% 0 0 1.375%          EM
INDONESIA 22-Mar 4.25% 0 0 4.75%          EM
UNITED KINGDOM 22-Mar 0.50% 0 0 0.25%          DM
RUSSIA 23-Mar 7.50% -25 -25 9.75%          EM

Friday, March 16, 2018

Oman central bank raises deposit rate 50 bps

      Oman's central bank raised its interest rate on capital deposits by 50 basis points to 1.50 percent, saying this change comes "after considering the prevailing interest rates within the Sultanate."
      In a statement dated March 14, the Central Bank of Oman added the revision in the rate takes effect from Jan. 1, 2018.
      The rate on capital deposits, was last changed on Feb. 2, 2015 when it was lowered by 50 basis points to 1.00 percent, with the decision retroactive to Jan. 1, 2015. The rate applies to the deposits that banks and financial companies are required to maintain at the central bank.
      Oman is a member of the six-nation Gulf Cooperation Council (GCC), whose currencies are pegged to the U.S. dollar. GCC also includes Saudi Arabia, UAE, Bahrain, Qatar, Kuwait.
      The rate hikes follows Saudi Arabia's rate hike on March 15 and comes a week before the U.S. Federal Reserve is expected to raise its rate on March 21.
      Unlike the other members of  GCC, Oman's central bank has not been raising its interest rates in synch with the Fed and the bank's former executive president has said he would not just blindly follow Fed decisions as Oman's economic cycle differs from that of the U.S.
      However, he added that rate increases may eventually become inevitable because of tightening liquidity in Oman's banking system.
       In September last year Oman's ruler, Sultan Qaboos, restructured the central bank's board, and appointed Tahir Salim al-Amri as new executive president.
       In a statement from October, the bank's board recognized the benefits of the peg to the U.S. dollar in terms of price stability, promoting economic growth, foreign direct investment and a stable interaction with the global economy.


Thursday, March 15, 2018

Saudi Arabia raises repo, reverse repo rates 25 bps

      Saudi Arabia's central bank raised its two benchmark interest rates by 25 basis points with immediate effect, saying in a short statement this move was "consistent for monetary stability in the evolving domestic and international monetary conditions."
      The rate hike by the Saudi Arabian Monetary Agency (SAMA) comes the week after it stopped offering repurchase agreements for 7, 28 and 90-day terms after Saudi money rates fell below U.S. rates for the first time in nine years.
      Saudi Arabia pegs its riyal to the U.S. dollar and Saudi rates below U.S. rates could trigger capital flows.
     SAMA's rate hikes comes a week before the U.S. Federal Reserve's meeting on March 21 when it is expected to raise its policy rate by 25 basis points.
      SAMA raised its repo rate by 25 percentage points to 2.25 percent and the reverse repo rate to 1.75 percent.
      The repo rate had been maintained at 2.0 percent since 2009 while SAMA has raised the reverse repo rate six times from 0.25 percent since December 2015, with the previous five hikes mirroring the Fed's rate hikes.
      The repo arrangements that were scrapped on March 5 were used by SAMA to lend short-term money to banks, and introduced in late 2016 when the Saudi banking system faced a liquidity squeeze from low oil prices.


Switzerland keeps expansive policy, franc 'highly valued'

     The central bank of Switzerland maintained its ultra-easy monetary policy stance and willingness to intervene in foreign currency markets to curb the exchange rate of the Swiss franc, which it said "remains highly valued" after recent gains.
      The Swiss National Bank (SNB) has kept its benchmark target for 3-month Libor rates at minus 1.25 - 0.25 percent and the rate on bank's sight deposits at minus 0.75 percent since it stunned financial markets in January 2015 by scrapping an upper limit on the franc's rate to the euro.
       "The situation in the foreign exchange market is still fragile and monetary conditions may change rapidly," the SNB said, adding its negative interest rates and a commitment to remain active in currency markets remain essential.
      Reflecting a rise in the franc's exchange rate against a weaker U.S. dollar between November and mid-February, the SNB lowered its inflation forecast slightly, with inflation this year seen averaging 0.6 percent from 0.7 forecast in December.
      For 2019 inflation is seen averaging 0.9 percent, down from 1.1 percent, and for 2020 inflation is seen rising to 1.9 percent.
       In February Switzerland's inflation rate dropped to 0.6 percent from 0.7 percent in January.
      Against the U.S. dollar, the franc was trading at 0.947, up 2.8 percent this year. Between November last year and mid-February the franc gained almost 9 percent but some of these gains have been given back since then.
       Against the euro, the franc was trading at 1.168 today, steady on the year. But the franc is still 2.7 percent higher against the euro than the rate of 1.20 cap that was scrapped a little over 3 years ago.
       Immediately following the SNB's move to scrap the upper limit on the franc, it surged over 20 percent but has been slowly losing ground since then.
      "The international economic environment is currently favorable," the SNB said, adding Swiss growth in the fourth quarter was mainly driven by manufacturing and capacity utilization had risen.
       Switzerland's Gross Domestic Product grew by an annual 1.9 percent in the fourth quarter of last year, up from 1.2 percent in the third quarter and the SNB said it still expects growth this year of around 2.0 percent, with unemployment continuing to decline.

Norway maintains rate but pulls forward hike to autumn

      Norway's central bank kept its key policy rate at 0.50 percent but pulled forward the expected time for tightening its policy stance to this autumn as economic growth is now seen faster than previously expected while inflation this year is seen topping the bank's new 2.0 percent target.
      "Monetary policy is expansionary. The outlook for the Norwegian economy suggests that it will soon be appropriate to raise the key policy rate," said Oeystein Olsen, governor of Norges Bank (NB), adding the key policy rate "will most likely be raised after summer 2018."
      In its March quarterly monetary policy report, the NB, which has maintained its rate at the current level since cutting it in March 2016, expects its policy rate to average 0.6 percent this year, up from 0.5 percent forecast in the previous monetary policy report from December.
       For 2019 the policy rate is seen averaging 1.1 percent, up from 0.9 percent, and for 2020 the policy rate is seen averaging 1.5 percent, up from 1.4 percent, and then reaching 2.0 percent in 2021.
       NB's executive board is next scheduled to meet in May, then June, August and September, with the quarterly monetary policy report updated in May and September.
      "There are prospects that growth in the Norwegian economy will be higher in 2018 than in 2017," Olsen said, adding the output gap will probably close earlier than assumed.
       In its two previous policy reports, NB also pulled forward its expected date for raising its key policy rate, with the December report laying out a rate path that implied an increase at the end of 2018 or early 2019.
       Overall, the central bank's executive board said the risks to its outlook were balanced.
       The economy is benefitting from improved domestic and foreign demand, with higher oil prices helping boost investment in its petroleum industry and solid global growth also helping to an upswing exports.
       On the other hand, the central bank said housing investment has fallen faster than expected and likely to fall further and cautioned that "there is a risk of growing protectionism, which over time may weigh on growth."
       The forecast for 2018 economic growth in the Norwegian mainland was raised by 0.3 percentage points to 2.6 percent but then lowered by 0.2 points in 2019 to 2.0 percent.
       Last year the economy grew by 1.8 percent.
       Norway's inflation rate in February rose to 2.2 percent from 1.6 percent in January, above the bank's new target of 2.0 percent, and NB raised its 2018 forecast to 2.1 percent from 1.9 percent.
       But in 2019 inflation is seen averaging only 1.7 percent and then 1.8 percent in 2020 before hitting 2.0 percent in 2021.
       On March 2 Norway's government lowered its inflation target to 2.0 percent from the 2.5 percent target that had been in place for 17 years. This put Norway in the same camp as most other developed economies, such as the U.S., the ECB, the U.K. and Sweden.
        NB's already said this new target wouldn't result in any significant changes in its conduct of monetary policy and echoed this conclusion today, adding its targeting regime is flexible and weight is also given to output and employment.
        A special feature in the monetary policy report looks closer at the effect of this new target.
       The immediate implication of a lower inflation target is some monetary tightening, which is likely to strengthen the krone's exchange rate, curb inflation expectations and inflation.
       "After a period, the nominal interest rate will have to be reduced to prevent the real interest rate from becoming too high," the report says, adding in the long term inflation and the nominal interest rate will fall by half a percentage point.
       Norway's krone, which typically mirrors movements in crude oil prices, has been rising in recent months and was trading at 7.70 to the U.S. dollar today, up 6.5 percent this year.

Wednesday, March 14, 2018

Serbia cuts rate 25 bps on continued fall in inflation

       Serbia's central bank lowered its key policy rate by 25 basis points to 3.25 percent, saying inflation is expected to continue to decline in coming months and first approach the midpoint of its target range in 2019 due to the comparison with prices of products that saw one-off increases last year.
       It is the first rate cut the National Bank of Serbia (NBS) since October 2017 but continues an easing cycle that first began in May 2013. Since then the policy rate has been cut by 850 basis points.
      But the NBS said developments in international financial markets and global commodity prices still mandate "caution" in its monetary policy, with uncertainty prevailing in financial markets due to the monetary policies of the U.S. Federal Reserve and the European Central Bank, and the relationship between their currencies.
       The rate cut by the interest-rate setting of the NBS' executive board comes after the originally scheduled meeting was postponed from March 8 due to the commitments of some of its members.
       In its policy statement from January the NBS said it expected inflation to drop below the midpoint of its target in the first half of this year.
       While headline inflation dropped to 1.5 percent in February from 1.9 percent in January, NBS said core inflation fell to 1.3 percent in February, confirming low inflationary pressures from anchored inflation expectations around the target midpoint and growth in domestic demand.
       NBS targets inflation of 3.0 percent, plus/minus 1.5 percentage points.
      "By lowering the key policy rate amid low inflationary pressures, the NBS will provide additional support to credit activity and economic growth," the central bank said.
       Serbia's economy slowed in the fourth quarter of last year to quarterly growth of 0.6 percent but was up 2.5 percent year-on-year for average growth last year of 2.0 percent, with activity dampened by a low harvest due to months of drought.
       Serbia's jobless rate rose to 14.7 percent in the fourth quarter of last year from 13 percent in the same 2016 quarter.
       This year the economy is forecast to expand by 3.5 percent.
       On Monday the Serbian government, including NBS Governor Jorgovanka Tabakovic, and the International Monetary Fund began talks over future cooperation after a 3-year, US$1.32 billion standby loan agreement expired in February.
       "After three years of effort under the program, the economy has turned around," the IMF said, adding Serbia had concluded the program with "flying colors" and managed to dig itself out of a hole.  
       The aim of the new cooperation agreement is to help Serbia catch up with other Western European countries and transform itself into a full-fledged market economy. To reach this goal it is urgent to avoid the exodus of skilled Serbian workers in search of a better life, IMF added.
       The NBS has been intervening in foreign currency markets this year to curb the rise in the dinar's exchange rate and is estimated to have sold 360 million euros.
        The dinar was trading at 118.29 to the euro today, up 0.4 percent this year and 4.04 percent higher than at the the start of 2017.

Tuesday, March 13, 2018

Argentina maintains rate, confirms peso intervention

       Argentina's central bank kept its monetary policy rate at 27.25 percent and confirmed its intervention in foreign exchange markets in recent weeks to "sustain the value of the currency" and ensure that inflation continues to trend downward.
      The Central Bank of Argentina (BCRA), which cut its policy rate twice in January by a total of 150 basis points, also pledged that it is monitoring the situation on the foreign exchange market and "will not relax its monetary policy until signs of disinflation compatible with the path sought are confirmed."
       Today's guidance follows it previous guidance in late February that it would "exercise extreme caution" before relaxing its monetary policy. 
       BCRA has been intervening in the foreign exchange market in recent weeks to shore up the peso, which has weakened steadily since Mauricio Macri's government in late December pushed back its aim to lower inflation to 5 percent by one year to 2020 and raised the 2018 inflation target to 15 percent from a previous 8-12 percent. 
       BCRA said it decided to intervene because it was convinced that a depreciation of the peso greater than what already happened was not justified by real economic conditions or the planned course of monetary policy. 
        Without any intervention in support the peso, the disinflation process would potentially slow down, the central bank said, adding it ratifies its policy of a floating exchange rate with occasional interventions as a complement to monetary policy "in the face of disruptive dynamics capable of altering the course of inflation or generating negative effects on financial conditions."
         On March 8 the central bank was reported to have intervened in the currency market several times by selling U.S. dollars, its first intervention since August 2017. The first foreign exchange sales came after the peso topped 20 to the U.S. dollar.
         In addition to the impact from a higher inflation target, Argentina suffers a seasonal shortage of dollars during its summer months as revenue from exports doesn't arrive until late March while holidays and overseas trips generate demand for foreign currency.
        "After the pronounced depreciation observed since December, during the last weeks the peso continued to show signs of weakness," BCRA said.
        Today the peso was trading at 20.2 to the dollar, down 7.9 percent since the start of 2018 and down 21.5 percent since the start of 2017.
        Argentina's headline inflation rate rose slightly to 25 percent in January from 24.9 percent in December while core inflation was steady at 21.1 percent.
        For February the BCRA said inflation is expected to rise further due to higher regulated prices and the prices of some tradable goods.
        But the central bank said it considers this acceleration in inflation as "temporary" and inflation should consolidate the downward trend after adjusting to higher prides and exchange rate dynamics.
        BCRA said the latest survey of market expectations showed inflation expectations for 2018 rose to 19.9 percent from 19.4 percent for general inflation and to 17.1 percent from 16.9 percent for core inflation. For the next 12 months, expectations eased to 17.6 percent from 18.6 percent.

        For 2019 inflation expectations rose to 14.0 percent from 13.5 percent and to 9.7 percent from 9.1 percent for 2020. 
        In addition to rising inflation, Argentina is experiencing its worst drought in 30 years, which has led economist to lower their growth forecasts for this year to 2.5 percent from 2.9 percent due to the expectations that the harvest of corn and soybeans, which make up more than one-third of its exports, will decline.
        Argentina's economy grew by an annual rate of 4.2 percent in the third quarter of last year and is estimated to have grown 2.9 percent in 2017.