Thursday, August 21, 2014

Two Reasons Why Interest Rates Will Rise

(Following article is written by Michael Lombardi of Profit Confidential for Central Bank News, which occasionally will carry articles by guest contributors if they are of interest to our readers.)

    By Michael Lombardi for Profit Confidential
    The U.S. dollar is still regarded as the reserve currency of the world. The majority of international transactions are settled in U.S. dollars and most central banks around the word hold it in their foreign exchange reserves.
    But since the Credit Crisis of 2008, and the multi-trillion-dollar printing program by the Federal Reserve, the supremacy of the U.S. dollar as the “world’s currency” has been challenged.
    The BRICS countries (Brazil, Russia, India, China, and South Africa) have agreed on starting a new development bank that will compete with the International Monetary Fund (IMF) and the World Bank. (Source: Washington Times, August 5, 2014.) Both the IMF and World Bank are “U.S. dollar”-based.
    Since the year 2000, the U.S. dollar composed about 56% of all reserves at central banks. But after the Credit Crisis, that percentage started to decline. In 2013, the greenback made up only 32.43% of all foreign exchange reserves at foreign central banks. (Source: International Monetary Fund COFER data, last accessed August 11, 2014.)

Wednesday, August 20, 2014

Central Bank News Link List - Aug 20, 2014 - Fed officials said job gains may bring faster rate increase

Iceland holds rate, current rate enough to curb inflation

    Iceland's central bank maintained its benchmark seven-day lending rate at 6.0 percent and softened its earlier warnings of a possible need to raise interest rates, saying "the slack in the monetary policy stance has probably disappeared, and it appears, based on the Bank's baseline forecast, that the current interest rate will suffice to keep inflation at target."
    The Central Bank of Iceland, which has held its rate steady since November 2012, said that its updated forecast shows that the outlook for inflation has improved since the May forecast while growth this year will be slightly less than expected although domestic demand will be stronger.
    "It now appears that inflation will remain close to target during the forecast horizon," the central bank said, with a positive output gap forecast to develop later and be less pronounced than assumed in the previous forecast.
    The central bank's guidance today compares with its guidance from June when it said increased growth in domestic demand would probably require further increase in the bank's real rate but whether this required higher nominal rates would depend on inflation and inflation expectations.

Namibia raises rate to curb credit, luxury good imports

    Namibia's central bank raised its benchmark repo rate by 25 basis points to 6.0 percent, its second rate rise in a row, to "contain the strong growth in household credit, which is largely financing unproductive imported luxury goods and putting additional pressure on the international reserves of the country."
    The Bank of Namibia, which has now raised its rate by 50 basis points this year, also said the country's trade deficit widened further in the first half of the year due to higher imports, mainly of capital inputs but also passenger vehicles and other consumer goods, including luxury goods.
    The central bank did not provide data for the trade balance in the first six months but in the first quarter of the year the trade deficit grew to 7.319 billion Namibian dollars from 4.448 billion in the previous quarter as imports rose to 17.476 billion from 15.870 billion and exports fell to 10.157 billion from 11.422 billion.
    Namibia's inflation rate, which has been rising steadily since December last year, eased in July to 5.6 percent after rising from 4.4 percent in December to 6.1 percent in June.

Monday, August 18, 2014

Central Bank News Link List - Aug 18, 2014 - Australia’s central bank ponders risks to economic outlook

Here's today's Central Bank News' link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don't miss any important news.

This week in monetary policy: Namibia and Iceland

    This week (August 18 - 22) only two central banks are scheduled to decide on monetary policy: Namibia and Iceland.
    Following table includes name of the country, its MSCI classification, the date the policy decision will be announced, the current policy rate, and the rate one year ago.

NAMIBIA 20-Aug 5.75% 5.50%
ICELAND 20-Aug 6.00% 6.00%

Sunday, August 17, 2014

Monetary Policy Week in Review – Aug 11-15, 2014: 3 banks cut as geopolitical uncertainty gnaws at sentiment

    Last week in global monetary policy three central banks (South Korea, Chile and Armenia) cut their key rates to shore up economic growth amidst deep concern over geopolitical stability, a theme that is now reverberating through financial markets.
    Four of the nine central banks that issued policy statements last week specifically referred to geopolitical developments with the National Bank of Georgia again noting that domestic and external demand had already been impacted and this would further delay what it described as a necessary exit from accommodative monetary policy.
   The impact of international tensions in Ukraine and the Mideast on monetary policy was also referred to by Mark Carney, Bank of England (BOE) governor, in his press conference last Wednesday, though at this point it has not had any affect on U.K. policy.
    “I would say it’s early days, but it’s something we obviously have to monitor and if it becomes an important determinant obviously we’ll talk more directly to it,” Carney said, adding that geopolitical events can evolve rapidly.
    In addition to Georgia, South Korea, Armenia and Uganda’s central banks also referred to geopolitical uncertainties in their policy statements.
    "Financial and commodity markets also remain vulnerable to instability as geopolitical risks remain elevated," the Bank of Uganda said.
    The other recurring theme among central banks was the coming shift in monetary policy in the United States and the U.K., with emerging market central banks continuing to position themselves to avoid a repeat of last summer’s “taper tantrum” when global capital reversed course and started flowing out of emerging markets and back to advanced economies.
    "Looking ahead, there are a number of global risks that we need to be wary of, among other things, the normalization of Fed policy and the Bank of England, and the risk of spillovers and spillback from the weakening economy of emerging markets," Bank Indonesia (BI) said.
    Indonesia, along with Turkey, India and South Africa, were among those countries that were most seriously affected by the outflow of capital, with their central banks forced to raise interest rates to project their currencies and rein in accelerating inflation.
    South Korea was less affected by the last year’s shift in capital flows, but is still aware of the potential disruptions to global financial markets and economic growth from geopolitical tensions and the coming tightening in U.S. monetary policy.
    “The Committee forecasts that the global economy will sustain its modest recovery going forward, centering around advanced economies, but judges that the possibility exists of its being affected by the changes in global financial market conditions stemming from the shift in the US Federal Reserve’s monetary policy stance, by the weakening of economic growth in some emerging market countries and by geopolitical risks,” the Bank of Korea (BOK) said last week.

   Boosted by last week’s three rate cuts, the 90 central banks followed by Central Bank News have now cut their policy rates 44 times through the first 33 weeks of this year. Fourteen percent of this year’s 312 policy decisions have favored rate cuts, up from 12 percent at the end of the first half and 12 percent at the end of the first quarter.
    But the trend toward higher global rates continues to simmer under the surface, with policy rates so far this year raised 33 times, or 10.6 percent of the decisions taken, up from 9.3 percent at the end of June and 8.7 percent at the end of March.


COUNTRY MSCI      NEW RATE            OLD RATE         1 YEAR AGO
ARMENIA 6.75% 7.00% 8.50%
GEORGIA 4.00% 4.00% 3.75%
MOZAMBIQUE 8.25% 8.25% 8.75%
SOUTH KOREA EM 2.25% 2.50% 2.50%
INDONESIA EM 7.50% 7.50% 7.00%
UGANDA 11.00% 11.00% 11.00%
CHILE  EM 3.50% 3.75% 5.00%
SRI LANKA  FM 6.50% 6.50% 7.00%
BOTSWANA 7.50% 7.50% 8.00%

    This week (Week 34) only two central banks are scheduled to decide on monetary policy: Namibia and Iceland.


NAMIBIA 20-Aug 5.75% 5.50%
ICELAND 20-Aug 6.00% 6.00%