Thursday, July 18, 2019

Chile maintains rate, but may ease again if trends persist

     Chile's central bank left its monetary policy rate steady at 2.50 percent but said it may be necessary to "extend the current monetary stimulus" if the current trend of low inflation continues, with the magnitude of any easing to be assessed in the next quarterly monetary policy report.
      The Central Bank of Chile, which surprised economists by cutting its rate by 50 basis points in June, said information since its last policy report reflected "increased risks associated with the timely convergence of inflation to the target," in particular inflation for services, and the "risks surrounding the future evolution of activity and demand, in a context of high external uncertainty."
      At today's board meeting a majority of its members voted to maintain the rate but board member Pablo Garcia voted to lower the rate by 25 basis points.
     The central bank publishes a monetary policy report every quarter and in the June report the forecasts for economic growth, investment and domestic demand for this year were lowered.
     Economic growth this year was seen between 2.75 percent and 3.5 percent, down from a range of 3.0 percent to 4.0 percent in the March report, and 2018's 4.0 percent.
      In the first quarter of this year Chile's gross domestic product stagnated from the previous quarter and on an annual basis GDP growth eased to 1.6 percent from 3.6 percent in the fourth quarter of last year.
      Data for the second quarter point to "less than expected dynamism," the central bank said, due to a poor performance by the mining sector and additional downside risks may be expected in coming months.
     Exports had also contracted more than expected due to weakness in its trading partners, with growth expectations in the EES survey being lowered for this year and next year.
      Chile's inflation rate was steady at 2.3 percent in June and May, below the bank's 3.0 percent target, and inflation expectations for the end of this year and in 12 months have declined.
      Chile's peso has risen slightly this year and was trading at 683 to the U.S. dollar today, up 1.6 percent since the start of the year.

South Africa cuts rate 25 bps, data determines next move

    South Africa's central bank lowered its benchmark repurchase rate by 25 basis points to 6.50 percent amid an economic slowdown and said future policy decision will continue to be highly dependent and sensitive to risks to the outlook while it seeks to anchor inflation expectations near the midpoint of its target "in this persistently uncertain environment."
     It is the first rate cut by the South African Reserve Bank (SARB) since March 2018 and follows a rate hike in November 2018.
     While SARB Governor Lesetja Kganyago said the risks to growth and inflation were balanced in the near term, he is clearly concerned about the possible negative impact of any escalation of trade tensions and the absence of structural reforms - that are beyond the scope of monetary policy - that are limiting investment prospects.
     The rate cut was widely expected by investors and economists after the economy shrank by 3.2 percent quarter-on-quarter in the first quarter, inflation is steady and inflation expectations have declined, and the exchange rate of the rand has risen.
    SARB's quarterly projection model shows one cut to the repo rate by the end of the fourth quarter.
    South Africa's inflation rate has remained around the midpoint of its target range of 3.0 to 6.0 percent with the latest forecast lowered slightly to an average 4.4 percent for this year, down from 4.5 percent seen in April.
     For 2020 and 2021 the inflation forecast is unchanged at 5.1 percent and 4.6 percent, respectively, with inflation seen peaking at 5.4 percent in the first quarter of 2020.
     In May South Africa's headline inflation rate rose to 4.5 percent from 4.4 percent in April.
     "The MPC welcomes the continued downward trend in recent inflation outcomes and the moderation in inflation expectations of about one percentage point since 2016," said Kganyago, who this month was appointed for a second 5-year term after a bruising row within the governing African National Congress party (ANC) over SARB's mandate and role in the economy.
     After shrinking in the first quarter, mainly due to electricity shortages and labour strikes, SARB expects a rebound in the second quarter though low business confidence remains a concern.
     SARB lowered its outlook for growth this year to an average 0.6 percent from May's forecast of 1.0 percent, with the outlook for 2020 and 2021 unchanged at 1.8 percent and 2.0 percent, respectively.
     Since the monetary policy committee's last meeting in May, South Africa's rand has risen 3.3 percent against the U.S. dollar but on improved sentiment towards riskier assets, SARB still considers it slightly undervalued, with domestic growth and fiscal risks high on investors' list of concerns.
     The rand rose in response to SARB's rate cut to trade at 13.89 to the U.S. dollar, up 3.9 percent this year.

Ukraine cuts rate 50 bps as it returns to easing path

    Ukraine's central bank lowered its key policy rate by 50 basis points to 17.0 percent as it continues its cycle of easier monetary policy toward a rate of 8.0 percent as inflation gradually declines amid prudent fiscal policy, slower wage growth, relatively low energy prices and an ample supply of both domestic and foreign food products.
     In April the National Bank of Ukraine (NBU) took the first step onto a monetary easing path by cutting the rate 50 basis points after raising it six times by a total of 550 points between October 2017 and September 2018 to curb inflation from strong wage growth and consumer demand.
     But in June NBU paused after inflation topped its forecast two months in a row on a temporary spike in food prices. However, the central bank was still hoping to return to the easing cycle as underlying risk to inflation were falling.
      Although inflation dropped to 9.0 percent in June from 9.6 percent in May, consumer demand, production costs and higher administered prices are keeping it high and the central bank said this could slow the process of lowering the key rate to 8.0 percent.
      However, NBU still expects inflation to decline toward 6.3 percent by the end of 2019 and then return to its target range in early 2020, hitting the 5.0 percent target by end-2020.
     "The NBU's baseline scenario envisages the key policy rate to decrease further, to 8% over the coming years, provide that inflation steadily declines to the 5% target," NBU said, adding higher demand for domestic bonds and thus a higher exchange rate of the hryvnia would allow it to lower the policy rate faster than forecast.
     The central bank's rate hikes last year helped boost the hryvnia and lower inflation expectations and continued tight monetary policy will remain the main driver in lowering inflation as it limits pressure from consumer demand.
     Since early September 2018 the hryvnia has strengthened and today it was trading at 25.96 to the U.S. dollar, up 6 percent this year and up 9.4 percent since Sep. 4 last year when the trend changed.
     On the back of strong consumer demand, expectations of a good grain harvest, NBU raised its forecast for economic growth this year to 3.0 percent from April's forecast of 2.5 percent and the 2020 forecast to 3.2 percent from 2.9 percent.
     However, weak global activity and a decrease in gas transit to European countries from 2020 will still dampen economic growth and widen the current account deficit, NBU added.
     Ukraine's gross domestic product grew 2.5 percent in the first quarter of this year, down from 3.5 percent in the previous quarter.

Indonesia cuts rate 25 bps, sees space for further cuts

     Indonesia's central bank lowered its interest rates 25 basis points to encourage bank lending and boost the economy and signaled it is ready to lower rates further as there is "adequate space for accommodative monetary policy in line with low inflation expectations and the need to further stimulate economic growth."
     Bank Indonesia's (BI) cut its key BI 7-day reverse repo rate to 5.75 percent, its deposit rate to 5.0 percent and its lending facility rate to 6.50 percent, as widely expected.
     "This policy is consistent with low inflation expectations and the need to build economic growth momentum amidst a backdrop of easing global financial market uncertainty and controlled external stability," BI said.
     BI raised its rates six times last year by a total of 1.75 percentage points during the U.S. Federal Reserve's four rate hikes to bolster the exchange rate of the rupiah against a rising U.S. dollar.
     But the Fed's shift toward easier policy this year has stimulated investors' interest in emerging market assets and boosted the rupiah, giving BI space to lower its own rates without fear of capital outflows and financial instability.
     Today's rate cut follows BI's 50 basis points cut to its rupiah reserve requirements in June.
     "Ongoing trade tensions continue to pressure world trade volume and undermine global economic growth," BI said, adding slower global growth has amplified downside pressure on commodity prices, including oil, with easier monetary policy by central banks lowering financial market uncertainty and driving capital flows to developing economies.
     The rupiah has been one of the main beneficiaries of this shift in capital and has been rising against the U.S. dollar since November last year.
      Today the rupiah rose further to 13,960 to the dollar, up 4.3 percent this year and up 9 percent since Oct 31, 2018, boosted by an upgrade of its sovereign rating.
     BI said it expects the inflow of foreign capital to further strengthen the rupiah.
     Indonesia's economy slowed in the first quarter as exports declined and BI said further stimulation of domestic demand, including investments, was "required in order to mitigate the adverse impact of global economic moderation."
     Indonesia's gross domestic product grew 5.07 percent in the first quarter of this year, down from 5.18 percent in the fourth quarter of last year, but BI confirmed it still expects growth this year below the midpoint of 5.0-5.4 percent.
     In addition to the rate cut, BI said it would institute a policy mix in cooperation with the government and other authorities to boost exports and tourism and attract foreign direct investment.
     Indonesia's current account deficit, one of the reasons behind last year's rate hikes, is expected widen in the short run as exports decline but further ahead it is expected to narrow this year to 2.5-3.0 percent of GDP from almost 3.0 percent in 2018 as foreign capital is attracted.
      Indonesia's inflation rate eased slightly to 3.28 percent in June from 3.32 percent in May and BI reiterated it still expects inflation this year to be below the midpoint of its target corridor of 3.5 percent, plus/minus 1 percentage points.

South Korea cuts rate 25 bps, to keep easy policy stance

     South Korea's central bank cut its benchmark base rate by 25 basis points to 1.50 percent and said it will maintain an accommodative monetary policy stance as economic growth is expected to be moderate and inflationary pressures will remain low in response to a slowing global economy from trade disputes between the U.S. and China.
     It is Bank of Korea's (BOK) first rate cut since June 2016 and reverses the 25-point rate hike in November 2018, which was partly due to concern over rising household debt but also to give the central bank some more room to deal with any future economic downturns.
     The rate cut comes after recent data showed a large drop in South Korean exports as the global economy cools, and BOK lowered its forecast for 2019 economic growth to around 2.2 percent from April's forecast of 2.5 percent, which had been cut from an earlier 2.6 percent.
    South Korea's won fell 0.3 percent immediately after the rate cut to 1,182.6 per U.S. dollar, pushing this year's depreciation to 5.5 percent, before settling slightly higher at 1,178.5.
     "The Board (of BOK) judges that the pace of domestic economic growth has slowed as construction investment has continued undergoing an adjustment and the slowdowns in exports and facilities investment have deepened, although consumption has continued to grow moderately," BOK said.
     South Korea's gross domestic product slowed to annual growth of only 1.7 percent in the first quarter of this year, down from 2.9 percent in the fourth quarter of last year, with exports in the second quarter down 8.4 percent after a 8.5 percent fall in the first quarter.
     BOK expects the decline in construction investment to continue as exports and facilities investment also recover later than it had expected while consumption will continue to grow.
     South Korea's inflation rate has remained well below its 2.0 percent target - it was steady at 0.7 percent in May and June - and BOK expects inflation to remain below the path it predicted in April.
     BOK forecast headline inflation would fluctuate below 1.0 percent for some time and then run at the low to mid-1.0 percent level in 2020.

Tuesday, July 16, 2019

Pakistan raises rate 100 bps but tightening likely finished

    Pakistan's central bank raised its policy rate for the fourth time this year and the 9th time since January 2018 but said it was finished raising rates in response to the fall in the rupee over the last 1-1/2 years and from now on interest rates would be set in response to the outlook for inflation.
    The State Bank of Pakistan (SBP) raised its policy rate by a further 100 basis points to 13.25 percent and has now raised it by 325 points this year following hikes in January, March and May.
     Since January last year, when SBP began raising its rates, the central bank's monetary policy committee (MPC) has raised the main interest rate by a total of 7.50 percentage points to curtail inflation from the fall in the exchange rate of the rupee, which pushed up import prices.
     "With this decision on interest rates, the MPC is of the view that the adjustment related to interest rates and the exchange rate from previously accumulated imbalances has taken place," SBP said.
     The Pakistani rupee was trading at 159.3 to the U.S. dollar today, down 33.9 percent since December 2017, down 13.5 percent since the start of this year and down 7 percent since the previous policy meeting on May 20 when the key rate was raised 150 basis points.
     The MPC said today's rate hike took into account upside inflationary pressures from exchange rate depreciation since May 20, the likely rise in near-term inflation from higher utility prices and other budgetary measures for fiscal 2020 taken in the wake of the agreement with the International Monetary Fund (IMF), and downside pressures on inflation from softer demand.
     "Going forward the MPC will be ready to take action depending on economic developments and data outruns," with unanticipated increases in the inflation outlook possibly leading to "further modest tightening," SBP said, adding:
     In contrast, greater-than-expected softening in domestic demand and thus a lower inflation outlook would provide "grounds for easier monetary conditions."
     The central bank raised its forecast for average inflation in the 2020 fiscal year, which began July 1, to 11 - 12 percent, slightly lower than IMF's forecast of 13.0 percent, but up from an average of 7.3 percent in 2018/19 when prices were boosted by the lagged impact of the lower rupee, government borrowings from the central bank, higher fuel and food prices.
      In June Pakistan's inflation rate eased to 8.9 percent from a 2019-high of 9.41 percent in March and 9.11 percent in May.
     In fiscal 2021 SBP expects inflation to fall "considerably" as one-off effects diminish.
     Following a staff-level agreement with the IMF in May on a 39-month, US$6.0 billion support package, the IMF board on July 3 approved the deal, making $1 billion immediately available and unlocking another $38 billion from Pakistan's international partners to support its economic reform.
     "A flexible, market-determined exchange rate and an adequately tight monetary policy will be key to correcting imbalances, rebuilding reserves, and keeping inflation low," IMF said.
      Strengthening the central bank's autonomy and eliminating its financing of the budget deficit will help its lower inflation and improve financial stability, IMF added.
     Last month Reza Baqir, who took over as SBP governor on May 4, described the exchange rate policy as a "market based exchange system" that follows supply and demand but the central bank would then intervene in the case of volatility.
     Under earlier governments, Pakistan had followed a "strong rupee" policy and effectively fixed the rupee against the U.S. dollar at a rate that was too high with the result the central bank burned through its reserves to defend the rupee.
     As of July 12, SBP's foreign exchange reserves had risen to US$8.0 billion, partly due to the IMF's first tranche, and are expected to rise further as international creditors release funds, including those related to the Saudi oil facility, and improved current account.
     Pakistan's economic growth has been slowing this year and SPB forecast 2019/19 gross domestic product growth of 3.3 percent, well below the government's target of 6.2 percent.
     Growth in the current fiscal year should improve to around 3.5 percent as the slowdown turns around in light of improved market sentiment, a rebound in agriculture and government incentives.

Sunday, July 14, 2019

This week in monetary policy: Kazakhstan, Pakistan, South Korea, Indonesia, Ukraine, South Africa & Chile

     This week - July 15 through July 20 - central banks from 7 countries or jurisdictions are scheduled to decide on monetary policy: Kazakhstan, Pakistan, South Korea, Indonesia, Ukraine, South Africa and Chile.
    Following table includes the name of the country, the date of the next policy decision, the current policy rate, the result of the last policy decision, the change in the policy rate year to date, and the rate one year ago.
    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

JUL 15 - JUL 20, 2019:
KAZAKHSTAN15-Jul9.00%0-259.00%         FM
PAKISTAN16-Jul12.25%1502257.50%         EM
SOUTH KOREA18-Jul1.75%001.50%         EM
INDONESIA18-Jul6.00%005.25%         EM
UKRAINE18-Jul17.50%0-5017.50%         FM
SOUTH AFRICA18-Jul6.75%006.50%         EM
CHILE 18-Jul2.50%-50-502.50%         EM

Thursday, July 11, 2019

Serbia cuts rate 25 bps in first easing since April 2018

    Serbia's central bank lowered its policy rate by 25 basis points to 2.75 percent to support economic growth amid subdued inflationary pressures and an "increasingly likely" new round of monetary easing by the U.S. Federal Reserve and the European Central Bank (ECB).
    It is the first rate cut by the National Bank of Serbia (NBS) since April 2018, when it wrapped up a 5-year easing cycle from May 2013 after cutting cut the key rate by 8.75 percentage points.
     The central bank's executive board said domestic and international economic developments, along with the future prospects, had set up the conditions for the rate cut, and the rate is now at the lowest level since NBS adopted inflation targeting as its monetary strategy in January 2009.
     After adopting inflation targeting, NBS was faced with inflation that topped 10 percent during 2011, 2012 and 2013. But in 2014 inflation finally fell and has now been below the bank's target of 3.0 percent, plus/minus 1.5 percentage points for the last six years.
      In May inflation dropped to 2.2 percent from 3.1 percent in April, which NBS last month said was the peak for the year, after which inflation is expected to embark on a downward path and move within its target tolerance band - albeit in the lower part - until the end of this year and in 2020.
      Low and stable inflation confirms an environment of subdued inflationary pressures along with inflation expectations that fell in June to below the target midpoint.
      Internationally, slower economic growth and lower than expected inflation are the main characteristics, which is why the ECB and Fed first decided to slow their pace of rate hikes and now appear increasingly likely to embark on new monetary easing, NBS said.
     "A slower pace of normalization or a new round of monetary easing should have a positive impact on conditions in the international financial market and on capital flows to emerging markets," NBS said, underscoring its oft-raised concern that Serbia could face higher borrowing costs in the event of disruptions in global financial markets that lead to a reversal of capital flows.

Wednesday, July 10, 2019

Canada maintains rate but trade conflicts cloud outlook

     Canada's central bank left its benchmark target for the overnight rate steady at 1.75 percent but turned slightly more dovish as the outlook is clouded by "escalating global trade conflicts and geopolitical tensions" that is weighing on business sentiment despite stronger-than-expected economic growth in the second quarter.
     The Bank of Canada (BOC), which has kept its key rate steady since October 2018, said the economy, as expected, was returning to its growth potential after temporary weakness in late 2018 and early 2019, and raised its 2019 growth forecast to 1.3 percent from April's forecast of 1.2 percent as a surge in oil production helped propel growth, consumer spending continues to grow steadily and residential investment appears to have stabilized.
     But softer foreign demand, lower commodity prices and trade restrictions are leaving their negative impact and BOC lowered its 2020 growth outlook to 1.9 percent from a previous 2.1 percent. The outlook for 2021 was unchanged at 2.0 percent.
     Canada's gross domestic product grew 1.3 percent year-on-year in the first quarter of this year, down from 1.6 percent in the previous quarter, but BOC raised its forecast for growth in the second quarter to 1.3 percent from 1.0 percent in its latest monetary policy report.
     After holding its rate steady at 0.50 percent for two years, BOC in July 2017 began tightening its monetary policy stance and raised its rate five times before pausing in October 2018 as the global economic momentum began to wane.
     As other major central banks, BOC turned more dovish in the beginning of this year but in May it turned slightly more upbeat as it became clear the slowdown at the end of last year and early this year was temporary and the economy was beginning to rebound.
     Today's statement is slightly more downbeat than in May, reflecting an economy that is growing around its potential but uncertainty from trade conflicts and global tensions is taking a toll on business sentiment and clouding the outlook.
     "Taken together, the degree of accommodation being provided by the current policy interest rate remains appropriate," BOC said, adding it would be paying particular attention to the energy sector and the impact of trade conflicts on the prospects for growth and inflation in incoming data.
     Inflation is largely in line with BOC's target of 2.0 percent and is forecast to ease to 1.8 percent this year, slightly down from 1.9 percent in April's monetary policy report, before rising to 1.9 percent in 2020 and 2.0 percent in 2021.
     In May Canada's headline inflation rate jumped to 2.4 percent from 2.0 percent on higher transport  and food costs.

Monday, July 8, 2019

This week in monetary policy: Israel, Malaysia, Canada, Serbia, Egypt, Peru & Sri Lanka

    This week - July 8 through July 13 - central banks from 7 countries or jurisdictions are scheduled to decide on monetary policy: Israel, Malaysia, Canada, Serbia, Egypt, Peru and Sri Lanka.
    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.

JUL 8 - JUL 13, 2019:
ISRAEL8-Jul0.25%000.10%         DM
MALAYSIA9-Jul3.00%-25-253.25%         EM
CANADA10-Jul1.75%001.50%         DM
SERBIA11-Jul3.00%003.00%         FM
EGYPT11-Jul15.75%0-10016.75%         EM
PERU11-Jul2.75%002.75%         EM
SRI LANKA12-Jul7.50%-50-507.25%         FM

Wednesday, July 3, 2019

Sweden keeps rate, forecast for hike late 2019/early 2020

     Sweden's central bank left its benchmark repo rate unchanged at minus 0.25 percent, as expected, and said it remains on track to raise its rate "again towards the end of the year or at the beginning of next year" as economic activity remains strong and inflation is close to its target.
     In December 2018 Sveriges Riksbank raised its rate for the first time in 7-1/2 years and had pencilled in another rate hike in the second half of this year.
     But in April the Riksbank pushed back its timeframe for the rate hike to late 2019 or early 2020 as inflation was slightly weaker than expected.
     Today the Riksbank's executive board said Sweden's economy had developed largely in line with its forecast from April despite higher uncertainty abroad and "increasing unease over further deterioration in trade relations and a faster decline in global economic activity."
     Although the Riksbank maintained its forecast for the repo rate to slowly return to positive rates in coming years, it acknowledged global developments may impact Sweden, which "underlines the importance of proceeding cautiously with monetary policy. If the conditions for inflation change were to change, monetary policy will be adjusted."
     In an update to its forecasts, the Riksbank saw the repo rate averaging -0.2 percent this year, unchanged from April, then 0.1 percent in 2020 and 0.5 percent in 2021.
     Economic activity in Sweden has remained solid in recent months and the central bank raised its forecast for 2019 growth to average 1.8 percent from April's forecast of 1.7 percent and 2018's 2.4 percent.
     Next year growth is expected to cool to 1.6 percent, down from the previous forecasts of 1.9 percent, and then accelerate to 1.8 percent in 2021.
     Sweden's gross domestic product slowed slightly to 2.1 percent annual growth in the first quarter of this year from 2.4 percent in the previous quarter
     Inflation in Sweden has been close to the Riksbank's 2.0 percent target since early 2017 with core inflation up to 2.1 percent in May from 2.0 percent in April.
    The central bank lowered its 2019 forecast for core inflation to 1.7 percent from a previous 1.8 percent but retained the forecasts for 1.8 percent inflation in 2020 and 1.9 percent in 2021.