Thursday, April 20, 2017

Indonesia maintains rate, growth to accelerate in Q2

    Indonesia's central bank left its benchmark 7-day reverse repo (RR) rate steady at 4.75 percent, as expected, saying economic growth in the first quarter of this year was likely to be below expectations due to slower growth in retail and automotive sales.
     However, growth is expected to accelerate in the second quarter, supported by stronger investment and exports while consumption would be stable. Rising commodity prices and stronger external demand would help drive exports and investment, Bank Indonesia (BI) said.
    Last month BI forecast economic growth this year of 5.0 to 5.4 percent, up from 5.02 percent in 2016 and 4.88 percent in 2015 on stronger private consumption, rising exports, higher government spending and improve private and government investment.
     Economic activity in Indonesia slowed in the fourth quarter of last year as consumer spending eased along with government spending while exports and investments rose. On a quarterly basis, Gross Domestic Product shrank by 1.77 percent from the third quarter while on an annual basis GDP rose by 4.94 percent, down from 5.01 percent in the third quarter.
    BI cut its 7 day RR rate twice last year by a total of 50 basis points following four cuts in its previous benchmark rate by a total of 100 points from January through June.
    As in its March statement, BI said global economic growth is expected to continue to improve although it was keeping a close eye on a number of risks, such as inflationary pressure in developed countries, which could trigger tighter monetary policy,  higher U.S. interest rates and asset sales that could boost the U.S. dollar and thus the cost borrowing, geopolitical risks in Europe "related to the strengthening of the wave of populism," U.K. talks about leaving the EU, and Greek debt talks.
   Indonesia's inflation rate eased to a lower-than-expected 3.61 percent in March from 3.83 percent in February due to higher supply of food while administered prices declined due to lower airfares that helped reduce the impact of higher electricity rates.
    Indonesia's rupiah has been firm this year and was trading at 13,327 to the U.S. dollar today, up 1.3 percent since the start of this year.
     BI said appreciation of the rupiah was supported by macroeconomic stability and investors' positive view of the country's economic outlook coupled with easing global risks. This lead to an influx of non-resident capital to Indonesian stocks and government debt.

Sunday, April 16, 2017

This week in monetary policy: Malawi and Indonesia

    This week (April 16 through April 22) central banks from 2 countries or jurisdictions are scheduled to decide on monetary policy: Malawi and Indonesia.
    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.

APR 16 - APR 22, 2017:
COUNTRY                 DATE                RATE           LATEST                 YTD               1 YR AGO       MSCI
MALAWI 18-Apr 22.00% -200 -200 27.00%
INDONESIA 20-Apr 4.75% 0 0 6.75%          EM

Thursday, April 13, 2017

Ukraine cuts rate 100 bps as inflation seen on target

    Ukraine's central bank cut its monetary policy rate by a further 100 basis points to 13.0 percent as it lowered its outlook for economic growth but forecast that it would reach its inflation targets over the next three years.
    The National Bank of Ukraine (NBU) has now cut its rate by 1,700 basis points since starting on its easing cycle in August 2015, including cuts of 800 points in 2016.
     But it is the first rate cut since October last year as the central bank sought to counter a rise in inflation due to a weakening of the hryvnia's exchange rate, higher global commodity prices and an increase in minimum wages.
     But the hryvnia has been stable this year and even firmed this week despite news this week that NBU Governor Valaria Gontareva would resign on May 10.
     Gontareva joined the central bank in June 2014 when the country's economy was reeling under Russia's annexation of Crimea, military conflict in eastern Ukraine, a plunging exchange rate and accelerating inflation.
      But her stewardship of the central bank, which she reformed and streamlined, was critical in helping stabilize the economy by pulling down inflation from a peak of 60.9 percent in April 2015, shoring up confidence in the hryvnia and cleaning up the banking sector, which was dominated by oligarch-owned banks.
      Gontareva's resignation came a week after the International Monetary Fund (IMF) released a US$1 billion loan payment to Ukraine, funds that had been delayed since March over the lack of government reforms. The release of this tranche brings total funds disbursed to Ukraine so far to about $8.4 billion as part of a $17.5 billion bailout package.
     Although Ukraine's headline inflation rose to 15.1 percent in March from 14.2 percent in February, this was mainly due to a 49.5 percent jump in housing and government-regulated utility tariffs, with the rise lower than the central bank projected in January when it forecast a rise to 16.4 percent.
     "The situation in the FX market has helped weaken pressure on prices," the NBU said, adding an appreciation of the hryvnia since mid-January was underpinned by solid export revenues.
     The NBU maintained its forecast that inflation will decline to 9.1 percent this year although it will remain volatile and in double-digits in the second and third quarters due to the impact of higher administered prices before dropping to single digits in the fourth quarter.
      Next year inflation is forecast to ease to 6.0 percent in and then to 5.0 percent in 2019, which means inflation will meet the bank's 2017 target of 8.0 percent, plus/minus 2 percentage points, the 2018 target of 6.0 percent, plus/minus 2 points, and the 2019 target of 5.0 percent, plus/minus 1 point.
    After plunging in 2014 and 2015, Ukraine's hryvnia has been firming since mid-January and was trading at 26.9 to the U.S. dollar today, largely unchanged since the beginning of this year.
     But it is still down almost 11 percent since the start of 2016. From the start of 2014 to end-2015, the hryvnia depreciated by 66 percent. In March 2014 unmarked Russian troops invaded Ukraine's Crimean peninsula and later that year conflict broke out in eastern Ukraine.
     The NBU also confirmed a recent downward revision in its forecast for 2017 growth to 1.9 percent from a previous forecast of 2.8 percent due to a trade blockade by the country's government on the rebel-held eastern regions. The blockade will result in a loss of output from industries in that area, including metals and mining, coke and electricity.
     Next year Ukraine's economy is seen growing by 3.2 percent, up from its January forecast of 3.9 percent, and by 4.0 percent in 2019 as consumer and investment demand recovers. Last year Ukraine's economy grew by an estimated 1.8 percent.

Wednesday, April 12, 2017

Brazil cuts rate 100 bps, sees rate at 8.50% end-2017

    Brazil's central bank cut its benchmark Selic rate by 100 basis points to 11.25 percent and said the higher pace of monetary easing was appropriate in light of forecasts that point to a policy rate of 8.5 percent by the end of 2017 with the rate remaining at that level until the end of 2018.
    The Central Bank of Brazil has now cut its rate by 300 basis points since embarking on an easing cycle in October 2016 and by 250 basis points this year alone.
     In October and November last year the central bank cut the rate by 25 basis points each time and then accelerated the pace of easing to 75 points in both January and February this year.
    Copom, the central bank's monetary committee, was unanimous in today's decision to cut the Selic rate by one percentage point and said the future pace of monetary easing would depend on the degree of front loading of rate cuts, economic activity, inflation forecasts and expectations, and the economy's structural interest rate.
     Today's one percentage point rate cut had been expected by many following a decline in March inflation to the lowest rate since 2010 at 4.57 percent, down from 4.76 percent in February.
     Copom said convergence of inflation to its target of 4.5 percent was compatible with its current easing process and economic activity was stabilizing and should gradually recover this year.
    "The disinflation process is more widespread," the central bank said, adding that lower food prices amounted to a favourable supply shock and inflation expectations for 2017 were now around 4.1 percent and 4.5 percent for 2018, and slightly below that level of 2019.
     The central bank's inflation forecast for 2017 and 2018 were now around 4.1 percent and 4.5 percent based on the assumption the policy rate ends 2017 at 8.5 percent and stays at that level.
    The central bank targets inflation of 4.5 percent with a range of plus/minus 1.5 percentage point, a level that is likely to be lowered in June when it is being revised by the government. However, inflation has also overshot the bank's target in the last seven years.
    Brazil's Gross Domestic Product contracted by an annual rate of 2.5 percent in the fourth quarter of last year, the 11th consecutive quarter of shrinking output.
    But Brazil's real has been firming since January last year, following five years of depreciation, and was trading at 3.13 to the U.S. dollar today, up 4.2 percent this year.

Uganda cuts rate another 50 bps to boost credit, growth

     Uganda's central bank cut its Central Bank Rate (CBR) by another 50 basis points to 11.0 percent, saying there was scope to continue easing its monetary policy stance "given that core inflation is forecast to remain around the medium-term target of 5 percent and in line with efforts to support private sector credit and economic growth momentum."
     The Bank of Uganda (BOU) has now cut its rate by 100 basis points this year, following a similar reduction in February, and by 600 points since embarking on an easing cycle in April 2016.
    Uganda's headline inflation rate eased to 6.4 percent in March from 6.7 percent in February as core inflation declined to 4.8 percent from 5.7 percent.
    "The stability of the shilling exchange rate and subdued domestic demand have contributed to the dampening of inflationary pressures," the BOU said.
     On the other hand, food inflation has continued to rise to 20.7 percent in March from 18.8 percent in February due to drought that has affected food production.
     But the central bank's forecast indicates that the near-term outlook for inflation has improved due to the stable shilling, with the revised forecast calling for core inflation of around 5 percent in a year.
    But Uganda's economic growth has slowed in the first two quarters of the current 2016/17 financial year, which began July 1, 2016, and the BOU said its projected growth for 2016/17 of 4.5 percent "is unlikely to be achieved."
     In February the BOU cut its growth forecast to 4.5 percent from July's forecast of 5 percent but saw growth in 2017/18 of 5.5 percent.
    Uganda's Gross Domestic Product grew by only 0.8 percent in the fourth quarter of calendar 2016, up from a contraction of 0.1 percent in the third quarter, mainly due to the impact of adverse weather on agriculture output which fell by about 2 percent every quarter for four consecutive quarters.
    Uganda's shilling, which fell sharply in the last quarter of 2016, has been more stable this year, though depreciating slightly.
     The shilling was trading at 3,616.6 to the U.S. dollar today, down 0.4 percent this year.
     The BOU maintained its band of plus/minus 3 percentage points around the CBR rate and the margin on the rediscount rate at 4 percentage points so the rediscount rate was cut to 15 percent and the bank rate to 16 percent, respectively.


Argentina raises rate 1st time this year as inflation rises

    The Central Bank of Argentina (BCRA) raised its monetary policy rate by 150 basis points to 26.25 percent, the first change in the rate since it was introduced this year, saying it considers it "appropriate to tighten liquidity conditions to ensure that the disinflation process in the coming months is consistent with the targets set for the year."
     The BCRA began using the 7-day interbank lending rate as its reference rate in January after using the rate on 35-day Lebac securities, which were auctioned once a week to mop up liquidity.
    When the central bank switched to the 7-day lending rate as its benchmark, it maintained the rate at 24.75 percent, the level of the Lebac since Nov. 29, 2016. Last year the Lebac rate was lowered from a high of 38.0 percent as inflation and inflation expectations eased.
     But inflation has been volatile as the government of President Mauricio Marcri, who took office in December 2015, continues to remove a raft of energy and transport subsidies to reduce the fiscal deficit and dismantle the strict economic controls that were implemented by his predecessor, two-term leader Cristina Fernandez de Kirchner.
      Days after taking office, Macri removed currency controls and let the peso float, leading to a devaluation of about 30 percent, pushing up import prices and thus inflation. 
      Marcri has vowed to tackle inflation and under BRCA President Federico Sturzenegger, who took over from Alejandro Vanoli in December 2015, the BCRA in September 2016 adopted inflation targeting instead of a currency swap system.
      The central bank's rate hike on April 11 follows higher-than-expected monthly inflation of 2.4 percent in March compared with February's 2.5 percent, with a survey showing a rise in 2017 general inflation expectations to 21.2 percent from 20.8 percent, much higher than the BCRA's 2017 target of inflation between 12 and 17 percent.
      For 2018 expectations for overall inflation rose while they eased for core inflation, BCRA said, adding they remain above next year's inflation target of 8 - 12 percent.
     The central bank said it had expected inflation to accelerate from low levels in January due to higher regulated prices - electricity prices were raised in February - and higher fresh food prices.
     BCRA added inflation in April would remain higher than its target and core inflation in the last nine months has fluctuated between 1.3 and 1.9 percent, a level that it "considers necessary to reduce."
     The exchange rate of the peso firmed in response to the central bank's rate hike and was trading at 15.16 to the U.S. dollar, up 4.5 percent this year.

Namibia holds rate as growth remains low, inflation high

    Namibia's central bank maintained its benchmark repurchase rate at 7.0 percent, saying this rate "remains appropriate to support growth, while maintaining the one-to-one link between the Namibian Dollar and the South African rand."
     The Bank of Namibia, which has kept its rate steady since raising it by 25 basis points 12 months ago, added domestic growth slowed in 2016 from 2015 and early indications show this weakness has continued in the first two months of this year due to "bleak performance in the mining sector, particularly diamond production."
      Manufacturing output and wholesale and retail trade, which had been resilient in the past, also fell while private and government construction works contracted. In contrast, cargo volumes in transport and value addition in communications had risen, the central bank said.
     Namibia's Gross Domestic Product shrank by 1.7 percent in the fourth quarter from the third for an annual decline of 3.1 percent after falling by 0.8 percent in the third quarter.
    For the full 2016 year, GDP grew by only 0.2 percent after 6.1 percent growth in 2015.
    Inflation decelerated in February to 7.8 percent from 8.2 percent in January but was up from 2016's average of 6.7 percent.
    Annual growth in private sector credit slowed to an average of 8.8 percent in the first two months of this year from a peak of 13.7 percent in January 2016 while the stock of international reserves fell to 22.3 billion Namibian dollars as of March 31 from N$22.9 billion on Jan. 31.
    Last month the central bank tightened its regulations for the purchase of second and further properties to lower the exposure of bans in response to a sharp rise in property prices in the capital of Windhoek and the tourist town of Swakopmund as demand outstrips supply.
     According to the central bank, the real estate sector in Namibia constitutes more than half of the total value of loans and advances.

Monday, April 10, 2017

Mozambique cuts rate 50 bps, sets new benchmark

    Mozambique's central bank lowered its benchmark standing facility rate by 50 basis points to 22.75 percent and set the new monetary policy interest rate (MIMO) at 21.75 percent.
     It is the first rate cut by the Bank of Mozambique since November 2014 and the first change in rates since a sharp 600 point rate hike in October last year. In 2016 the central bank raised its rate by a total of 13.50 percentage points last year as it battled rising inflation and currency depreciation.
    The central bank said the rate cut reflected a favorable change in inflation and the exchange rate of the metical despite the risks of further price changes, worsening liquidity in the banking system and the resumption of foreign aid to the government.
     In February the central bank's monetary policy committee (CPMO) announced it would be switching to MIMO as new benchmark rate with effect from April 15 to strengthen the formation of interest rates and make the process more transparent and in line with international practices.
     At that time, the central bank also said its two rates that have been used to intervene in markets, the permanent liquidity transfer facility rate (CPF) and the Permanent Deposit Facility rate (FPD) would remain, with the new monetary policy rate fluctuating between those two rates.
    Today the central bank said the FPD rate was maintained at 16.25 percent while the compensation reserve ratio (RO) for liabilities in domestic and foreign currency was at 15.50 percent.
     The central bank also adjusted its prudential standards for financial institutions, in line with international best practice, raising the minimum capital stock over three years to 1.7 billion meticais from 70 million meticais and the minimum solvency ratio to 12 percent from 8 percent.
     Mozambique's inflation rate rose slightly in February to 20.88. percent from 20.56 percent in January but remains below the record high of 26.35 percent in November 2016.
     Gross Domestic Product grew by an annual rate of 1.1 percent in the fourth quarter of last year, down from 3.7 percent in the third quarter.
     Mozambique's economy has been hit by several severe blows in recent years, leading to a sharp fall in the exchange rate of its metical currency. 
     On top of the fall in global commodity prices, including coal, last year it was discovered the government had hidden almost US$1.4 billion of debt, the equivalent of 10 percent of its Gross Domestic Product. This led to foreign donors, including the International Monetary Fund, to withdrew funding to the country.
    The metical hit record lows of around 78.5 to the U.S. dollar in October last year but has firmed since then, helped by central bank rate hikes and rising commodity prices.
    Today the metical was trading at 66.3 to the dollar, up 18.4 percent since the historic lows last October and up 7.4 percent this year. 
    But compared with the beginning of 2015, the value of the metical is still about half its exchange rate of 33 to the dollar on Dec. 31, 2014.