Saturday, August 24, 2019

This week in monetary policy: Kyrgyzstan, Hungary, Jamaica, Iceland, Israel, Fiji, Botswana, Gambia, South Korea, Bulgaria, Colombia & Dominican Rep.

    This week - August 25 through August 30 - central banks from 12 countries or jurisdictions are scheduled to decide on monetary policy: Kyrgyz Republic, Hungary, Jamaica, Iceland, Israel, Fiji, Botswana, Gambia, South Korea, Bulgaria, Colombia and the Dominican Republic.
    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.

AUG 25 - AUG 30, 2019:
KYRGYZ REPUBLIC26-Aug4.25%0-504.75%
HUNGARY27-Aug0.90%000.90%         EM
ISRAEL28-Aug0.25%001.10%         DM
SOUTH KOREA30-Aug1.50%-25-251.50%         EM
BULGARIA30-Aug0.00%000.00%         FM
COLOMBIA30-Aug4.25%004.25%         EM
DOMINICAN REPUBLIC30-Aug4.75%-25-755.50%

Friday, August 23, 2019

Sri Lanka cuts rates another 50 bps, signals pause

     Sri Lanka's central bank lowered its policy rates by another 50 basis points but signaled it would now take a pause while it considers the impact of its easing measures, the fiscal performance and global developments, "prior to deciding upon the future trajectory of monetary policy going forward."
     The Central Bank of Sri Lanka (CBS) cut its Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) to 7.0 percent and 8.0 percent respectively.
     Along with a similar-sized rate cut in May, in the wake of the Easter Sunday suicide bombings that killed more than 250 people, and two cuts to the reserve requirements for banks, the central bank has now lowered its key rates by 100 basis points this year and the reserve ratio by 250 points following cuts in November 2018 and then in February this year.
     The central bank said the rate cuts were aimed a supporting a revival of economic activity in the context of low inflation as domestic and global headwinds are likely to delay the recovery of economic growth.
     "Therefore, it is essential that the available policy spaces are utilized to support productive economic activity without disrupting the improvements achieved in relation to macroeconomic stability," CBS said.
     Sri Lanka's economic slowed to a 17-year low of 3.2 percent in 2018, hit by a political crises, and in July the central bank slashed its 2019 growth forecast to 3.0 percent from 4.0 percent, partly in response to a fall in tourism, the country's third-largest source of foreign currency, after the bombings.
     The country is heading for a presidential election later this year and parliamentary elections next year, and earlier this month a central bank official warned Sri Lanka could lose access to global debt markets if a new government moves away from fiscal stability.
     Sri Lanka faces foreign debt repayments of over $16 billion in the next four years.
     CBS said annual growth in credit to the private sector had continued to decelerate during the first 7 months of the year and "a speedy reduction in market lending rates is needed to revive economic activity."
      Although the average weighted call money rate (AWCMR) had shown a notable decline in response to the May rate cut, it had yet to show a decline that is commensurate with the fall in deposit interest rates, the bank said, calling on financial institutions to lower their rates in response to the reduced cost of funds and thus boost credit flows and help revive the economy.
     Sri Lanka's inflation rate fell to 3.3 percent in July from 3.8 percent in June and the central bank expects it to remain around the lower bound of its target range of 4.0 to 6.0 percent for the rest of this year even if there are some transitory pressures from the recent rise in fuel prices and administrative changes in prices of certain commodities.
     After firming in the first half of this year, supported by the receipt of IMF funds, Sri Lanka's rupee has fallen this week and fell further in response to today's rate cuts.
     The central bank said the depreciation pressure seen in the past few days was mainly driven by foreign withdrawals from the government securities market by a few investors and is expected to be short-lived.
     The rupee was trading at 180 to the U.S. dollar today, down 1.7 percent since the end of last week but still 1.7 higher than at the start of this year.
      The central bank has proposed a series of changes to the laws governing monetary policy, the Monetary Law Act, that are expected to win parliamentary approval.
     The new law is aimed at strengthening the independence of the central bank, prevent it from printing money to finance government deficits, and introduce a form of flexible inflation targeting.

Thursday, August 22, 2019

Egypt cuts rate 150 bps as inflation continues to decline

     Egypt's central bank cut its key interest rates by a further 150 basis points and said the "pace and magnitude of future policy adjustments will continue to be subject to confirmation that inflation expectations are anchored at target levels that are consistent with disinflation and price stability over the medium term."
     The Central Bank of Egypt (CBE) cut its overnight deposit rate, the overnight lending rate, the rate on its main operation and the discount rate by 150 basis points each to 14.25 percent 15.25 percent, 14.75 percent and 14.75 percent, respectively.
     CBE has now cut its key rates by a total of 250 basis points this year following a cut in February and by a total of 450 basis points since February 2018 when it shifted into an easing cycle in response to slowing inflation following a surge after the exchange rate of the pound was floated in November 2016 as part of an agreement with the International Monetary Fund (IMF).
      "As incoming data continued to confirm the moderation of underlying inflationary pressures, the MPC (monetary policy committee) decided to cut the policy rates by 150 basis points," CBE said, adding this was consistent with its aim of lowering inflation to its target of 9.0 percent, plus/minus 3 percentage points by the fourth quarter of 2020.
      Egypt's inflation rate fell to 8.7 percent in July from 9.4 percent in June and 14.1 percent in May but the central bank cautioned the path for future policy rates is based on inflation expectations rather than current inflation rates and future rate changes are based on confirmation that inflation expectations are anchored to its target level.
     The larger-than-expected drop in July inflation to the lowest rate in almost four years surprised analysts who had expected inflation to rise following a cut to subsidies that pushed up fuel prices. But it also ignited expectations the central bank would cut its rates by at least 100 basis points today.
      CBE said the fall in inflation was supported by a containment of inflationary pressures and by favorable base effects as the recent fiscal consolidation measures were weaker than in the previous year.
      Egypt's economy is estimated to have expanded by 5.7 percent in the second quarter of this year, up from 5.6 percent in the first quarter, and by 5.6 percent in fiscal 2018/19, the highest rate in 11 years while unemployment is continuing to declined.

Indonesia cuts rate 2nd time, to keep easy policy mix

     Indonesia's central bank lowered its benchmark interest rates for the second month in a row and going forward it said it would "maintain an accommodative policy mix in line with low inflation expectations, maintained external stability and the need to build economic growth momentum."
     Bank Indonesia (BI) cut its key benchmark BI 7-day reverse repo rate by another 25 basis points to 5.50 percent and has now cut it by 50 basis points this year following a similar cut in July.
     BI also lowered the rate on its deposit and lending facilities by 25 points to 4.75 percent and 6.25 percent, respectively.
     Although the rate cut surprised many analysts, BI in July signaled it was ready to lower rates further to boost economic growth, which slowed in the second quarter, as inflation expectations remained low.
     The central bank said today the rate cut was consistent with inflation that is forecast to be below the midpoint of its inflation target, ensuring attractive returns on domestic financial assets and thus supporting external stability as well as a "pre-emptive measure to safeguard economic growth momentum going forward against the impact of global economic moderation."
     Last year BI raised its rates six times and by a total of 175 basis points during the U.S. Federal Reserve's four rate hikes to shore up the exchange rate of the rupiah and ensure inflation didn't rise.
     This year Indonesia, along with other emerging market economies, is facing a slowing global economy that is suppressing commodity prices and its exports.
      But despite the shift in global capital toward safer assets, such as government bonds in the U.S. and Japan as well as gold, the exchange rate of Indonesia's rupiah is holding up well and is expected to remain stable, with BI attributing this to an inflow of foreign capital that is looking for attractive returns amid the impact of looser monetary policy in advanced economies.
     "Ongoing trade tensions coupled with geopolitical risks are undermining world trade volume and global economic growth," BI said, noting Indonesia's economic growth slowed in the second quarter to 5.05 percent year-on-year from 5.07 percent due to the ongoing contraction in exports while stronger consumption and stable investment is still underpinning growth.
     BI confirmed its forecast for 2019 economic growth to be below the midpoint of the 5.0 to 5.4 percent range and forecast 2020 growth in the middle of a 5.1 to 5.5 percent range.
     Inflation in Indonesia remains low and stable, rising slightly to 3.32 percent in July from 3.28 percent in June and BI confirmed its forecast for inflation this year to be below the midpoint of its target corridor of 3.5 percent, plus/minus 1 percentage point.
     For 2020 BI forecast inflation would be within its lower target range of 3.0 percent, plus/minus 1 percentage point.
     After depreciating during the first 10 months of 2018, the rupiah bounced back from November through January and has been relatively stable since February. Today the rupiah was trading at 14,235   to the U.S. dollar, up 2.3 percent this year.
     Last month the International Monetary Fund said Indonesia's economy performed well last year despite the reversal of global capital flows, with economic growth this year and in 2020 seen remaining stable at 5.2 percent as credit growth of 12 percent is sustained and inflation remains within the target band while the current account deficit continues to narrow.

Wednesday, August 21, 2019

Paraguay cuts rate 4th time as economic activity slows

    Paraguay's central bank lowered its policy rate for the fourth time this year, saying economic activity had slowed amid rising uncertainty about a resolution to the trade tensions between the U.S. and China while inflationary pressures are not expected in coming months.
     The Central Bank of Paraguay (BCP) cut its monetary policy rate by another 25 basis points to 4.25 percent and has now cut it by 100 points following cuts in February, March and July.
     In addition to slower global economic activity, BCP said the regional outlook had become more complex in recent weeks, especially after the primary elections in Argentina, and the latest data show lower rates of growth in the economic activity in Brazil.
     Domestically, the aggregate indicator of activity showed a smaller decline in recent months while the index that excludes agriculture and electricity showed a slight rebound in June, the bank added.
     BCP has forecast 2019 growth of 1.5 percent, down from 3.7 percent in 2018.
     Looking ahead, the bank's monetary policy committee CEOMA said it considers flexible monetary conditions to be compatible with the convergence of inflation to its 4.0 percent target and it would continue to monitor domestic and external data to evaluate its next policy decision.
     Paraguay's inflation rate rose to 3.1 percent in July from 2.8 percent in June while its gross domestic product shrank 2.0 percent year-on-year in the first quarter of this year from growth of 1.0 percent in the previous quarter.
     Paraguay's guarani has been weakening since April last year and was trading at 6,110 to the U.S. dollar today, down 2.7 percent this year.

Zambia holds rate but may hike if inflation remains high

    Zambia's central bank left its policy rate steady at 10.25 percent, saying inflation is still expected to remain above the upper bound of its target range for much of the forecast horizon but then revert to the range toward the end this period amid a weakening of near-term growth prospects.
    However, the Bank of Zambia (BOZ), which raised its rate 50 basis points in May as inflation was forecast to remain above its target range of 6.0 - 8.0 percent, cautioned it "may adjust the Policy Rate upward, if inflation does not revert to the target range."
     In addition to recent data that points toward reduced economic growth, BOZ said liquidity challenges and constrained aggregate demand continue to weigh on economic activity, with gross domestic product projected to decline this year due to the effects of drought on agriculture, constrained electricity generation and lower than anticipated output from mining.
     BOZ didn't issue a growth forecast but last month the International Monetary Fund said Zambia's growth was projected to slow to 2.0 percent this year from an estimated 3.7 percent last year, reflecting a decline in mining activity and the impact on drought on hydro power production.
     BOZ said preliminary data show economic growth easing to 2.6 percent in the first quarter of this year from 2.7 percent in the same 2018 quarter, with data pointing to reduced growth in the second quarter.
     Zambia's inflation rate has accelerated this year due to a depreciation of the kwacha and higher food prices, pushing up inflation from an average 7.0 percent in 2018 to to 8.8 percent in July.
    BOZ expects inflation to remain above its 8.0 percent inflation limit for much of the forecast period due to a persistent rise in food prices from low agricultural output. But easing pressure on food prices is then expected to lower inflation toward the end of the forecast period.
     Key upside risks to this outlook stem from persistent drought, lower electricity generation, higher-than-expected fiscal deficits and elevated debt service payments, which is likely to impact inflation through the exchange rate and expectation channels.
     In addition, BOZ said weaker-than-projected global growth, partly due to an escalation of trade tensions between the US and China, is likely to impact copper prices, which may also affect the kwacha's exchange rate.
     After falling 15.6 percent against the U.S. dollar last year, the kwacha has continued to weaken this year and was trading at 13.12 to the dollar today, down almost 9 percent this year.
     The IMF in July forecast inflation would average 9.9 percent this year and 10.0 percent in 2020.

Sunday, August 18, 2019

This week in monetary policy: Zambia, Paraguay, Indonesia, Egypt, Sri Lanka and Jackson Hole

    This week - August 18 through August 24 - central banks from 5 countries or jurisdictions are scheduled to decide on monetary policy: Zambia, Paraguay, Indonesia, Egypt and Sri Lanka.
    Many central bankers, economists and academics will also be in the small U.S. city of Jackson Hole, Wyoming, to attend the Kansas City Fed's annual economic symposium from Aug. 22 to Aug. 24. The theme of this year's symposium, a decade after the global financial crises, is "Challenges for Monetary Policy," with Federal Reserve Chairman Jerome Powell scheduled to speak on Aug. 23.
    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.

AUG 18 - AUG 24, 2019:
ZAMBIA 21-Aug10.25%50509.75%
INDONESIA22-Aug5.75%-25-255.50%         EM
EGYPT22-Aug15.75%0-10016.75%         EM
SRI LANKA23-Aug7.50%0-507.25%         FM

Thursday, August 15, 2019

Mexico cuts rate 1st time in 62 months on growth risks

     Mexico's central bank lowered its policy rate for the first time in 62 months, saying inflation has decreased as it expected but the economy continues to stagnate and uncertainty about the relationship with the United States continues to pose a risk to economic growth.
     The Bank of Mexico (Banxico) cut its benchmark target for the overnight interbank interest rate by 25 basis points to 8.0 percent, its first rate cut since June 2014 following 15 rate hikes from December 2015 through December 2018 in response to a weakening peso and inflationary pressures.
      But in the wake of the U.S. Federal Reserve's change of course in late January this year to a more dovish stance, which resulted in a rate cut on July 31, Baxico also shifted its policy stance and is now following the Fed and 53 other central banks that have eased their policy stance this year.
     Banxico said a majority of its board member had voted to cut the rate, deciding that a lower interest rate is consistent with inflation converging toward its target of 3.0 percent. One board member voted to maintain the rate.
     The board added that it would maintain a prudent monetary policy stance during the current environment of uncertainty and closely follow the potential pass-through of fluctuations to the exchange rate to consumer prices along with the behavior of economic slack and price pressures.
     Noting the deceleration in world economic activity along with U.S. trade disputes, the central bank said the balance of risks to the world economy had deteriorated, and while the peso has fluctuated, interest rates on government securities have fallen and the latest data suggest weaker demand has widened the economy's slack more than expected so the balance of risks to economic growth remains biased to the downside.
      In July Mexico's inflation rate eased to 3.78 percent from 3.95 percent though inflation expectations remained relatively stable while the economy shrank 0.7 percent year-on-year in the second quarter after growth of 1.2 percent in the first quarter.

Norway holds rate but greater uncertainty going forward

    Norway's central bank kept its policy rate steady at 1.25 percent, saying the outlook for the policy rate ahead is little changed since June, when it forecast another rate hike would be likely this year, but acknowledged "the global risk outlook entails greater uncertainty about policy rates going forward."
     Norges Bank (NB), which raised its rate in June for the third time since September 2018 to contain inflation from strong economic growth, added the upturn in the Norwegian economy was continuing as it had expected though underlying inflation was a little lower than projected and "deepening trade tensions and heightened uncertainty surrounding the UK's relationship with the EU may weigh on growth abroad and in Norway."
      "On the other hand, a weaker krone may contribute to higher inflation ahead," NB added, waking a tightrope between inflation close to its target and a strong domestic economy amid a weaker currency and slowing global growth.
      NB's decision to retain its rate today was widely expected by analysts who said the bank's executive board normally doesn't change rates during an interim meeting, pencilling in the next rate hike for September when NB updates its quarterly economic forecast.
      Propelled by an investment boom in its oil and gas industry, and government spending on infrastructure, such as railways, Norway's economy has defied the slowdown in the global economy and the central bank has remained an outlier amid a sharp easing of global monetary policy.
      Recalling its latest monetary policy report on June 20, NB said capacity utilization in the country's economy was somewhat above normal, underlying inflation was a little higher than the bank's 2.0 percent target and the board's assessment was the "policy rate would most likely be increased further in the course of 2019."
      In response, analysts expected NB to raise its rate again in September or December, when it publishes its economic forecasts, with only a minority looking for NB to end its tightening campaign.
     While today's guidance from NB was balanced, the verdict from the foreign exchange market was one-sided, with Norway's krone continuing its recent decline.
     The krone fell 0.3 percent to 8.99 to the U.S. dollar in response to the NB's statement and is now down 3.2 percent this year and down by 8.8 percent since the start of 2018 despite three rate hikes.
     Norway's headline inflation rate was steady at 1.9 percent in July and June while gross domestic product shrank 0.1 percent in the first quarter from the previous quarter for annual growth of 2.5 percent, up from 1.9 percent in the previous quarter.
     In its June monetary policy report NB forecast its policy rate would average 1.1 percent this year, then 1.6 percent in 2020 and 1.7 percent in 2021 and 2022.
     But NB also lowered both its inflation and growth forecasts from its March forecasts.
     Consumer price inflation was seen averaging 2.2 percent this year, down from a previous forecast of 2.3 percent, then 1.9 percent in 2020 and 2.0 percent in 2021 and 2022.
      The 2019 growth forecast for mainland Norway was lowered to 2.6 percent from a previous 2.7 percent and the 2020 forecast to 1.9 percent from 2.0 percent. In 2021 growth was seen slowing further to 1.2 percent and then remaining at that rate in 2022.

Wednesday, August 14, 2019

Mozambique cuts rate another 50 bps after peace accord

     Mozambique's central bank lowered its monetary policy rate, MIMO, by a further 50 basis points to 12.75 percent as inflation continues to decelerate while the outlook has become more favorable following last week's signing of a peace accord.
     It is Bank of Mozambique's (BOM) second rate cut this year and the 11th since April 2017 as inflation has steadily fallen since topping 26 percent in November 2016 and the exchange rate of the metical has risen since hitting almost 80 to the U.S. dollar in October 2016.
     "The decision to reduce the minimum rate is justified by the continued improvement in the medium-term inflation outlook, which consolidates the stability of this indicator at single-digit levels," BOM said.
      BM also lowered its deposit rate by 50 basis points and the rate on its permanent lending facility to 9.75 percent and 15.75 percent,  respectively. However, it left the reserve ratio of domestic currency deposits at 14.0 percent and foreign currency deposits at 36.0 percent.
     The signing of the Peace and National Reconciliation Agreement on Aug. 6 between Mozambique's president and the leader of the main opposition group, paves the way for peaceful elections on Oct. 15 and ends violence that has persisted since a civil war ended in 1992 that has cost the lives of an estimated 1 million people.
     BOM said the outlook for inflation had become more favorable following the peace agreement and the beginning of the disarmament and demobilization process, though uncertainties still justify a conservative stance that should help bring down the cost of financing.
     Mozambique's inflation rate fell further to 2.16 percent in June and BOM said its forecast of stable domestic prices is still based on lower pressure in the foreign exchange market given that aggregate demand remains below potential and the favorable movement of oil prices.
     As far as Mozambique's economy, the central bank said it expects activity to decelerate further this year but then gradually recover in 2020, albeit it would remain below its potential. Last month BOM said growth in the medium term would be stimulated by post-disaster reconstruction and the completion of natural gas projects.
      Mozambique's gross domestic product grew an annual 2.5 percent in the first quarter of this year, down from 3.0 percent in the previous quarter while international reserves remain at a level that covers six months of imports, excluding large projects.
     Gross international reserves rose by US$111 million since the June monetary policy meeting to $3.244 billion.
     The exchange rate of Mozambique's metical has firmed sharply since late April this year after the country was hit by Tropical Cyclones Idai and Kenneth in March and April, which the International Monetary Fund estimated would dent economic growth this year from 3.3 percent last year.
      In April the IMF approved $118 million in emergency assistance to Mozambique, with the death toll from the two cyclones estimated at more than 1,000 people.
     The metical was trading at 60.49 to the U.S. dollar today, up 7 percent since late April and 1.8 percent since the start of this year.


Namibia cuts rate 1st time in 2 years as economy slows

     Namibia's central bank lowered its benchmark repo rate by 25 basis points to 6.50 percent, saying economic growth, inflation and growth in credit to individuals slowed during the first six months and "key risks to the global outlook remain, amongst others, escalating trade and geopolitical tensions and higher policy uncertainty across many countries, including Brexit."
     It is Bank of Namibia's (BON) first rate cut since August 2017 and brings the rate back to its level in January 2016 before the central bank embarked on a tightening cycle that lasted 17 months.
     The bank's monetary policy committee said the decision to cut the rate was "to support domestic economic activity and to maintain the one-to-one link between the Namibia Dollar and the South African Rand."
     Since BON's previous policy meeting in June, the South African Reserve Bank (SARB) on July 18 lowered its policy rate by 25 basis points, its first cut since March 2018 and one of 31 central banks that lowered their rates in the third quarter of this year in response to slowing global growth.
     As of July 31, Namibia's stock of international reserves rose to N$35.2 billion from N$34.1 billion in June, enough to cover 4.8 months of imports, and a level BON said was sufficient to protect the peg of the Namibia Dollar to the Rand and to meet its international financial obligations.
     The Namibian dollar trades at a rate of 1:1 to the rand, which has fallen against the U.S. dollar since SARB's rate cut. This has pulled down the Namibian dollar, which fell 1.4 percent today after the rate cut to 15.34 to the U.S. dollar to be down 5.9 percent this year.
     In April BON lowered its forecast for economic growth this year to 0.3 percent from December's forecast of 1.5 percent and said today the domestic economy was projected to remain weak in 2019.
     Last year Namibia's economy shrank for the second consecutive year and in June the International Monetary Fund said it expected growth to "remain mildly negative in 2019, as a poor rain season and reduced diamond production continued to weigh on a tentative recovery."
     The central bank said the slowdown in the first six months of this year was reflected in the mining, construction, electricity, and wholesale and retail trade, while the sectors of manufacturing, transport and communication improved as compared to the same 2018 period.
     Namibia's gross domestic product contracted 2.0 percent year-on-year in the first quarter of this year, up from 1.9 percent fall in the fourth quarter of 2018 and a 0.2 percent decline in the third quarter of 2018 for a 2018 decline of 0.1 percent after a 0.9 percent fall in 2017.
     Inflation in Nambia slowed to 3.9 percent in June from 4.1 percent in May and averaged 4.4 percent in the first half, with BON attributing the moderation to a decline in housing inflation.
     BON forecast average inflation of 4.3 percent in 2019, down from its June forecast of 4.5 percent.
     While average growth in private sector credit extension (PSCE) rose to 6.9 percent in the first half from 5.9 percent in the same 2018 period, BON said this was mainly due to higher uptake by credit in the retail, real estate, financial and mining sectors.
     But growth in credit to individuals "slowed somewhat" during the first half, BON added.
     Together with the country's ministry of finance, BON revised the country's loan-to-value (LTV) ratios, with the new maximum LTV for the first, non-primary residence raised to 90 percent from a previous 80 percent. The ratios for second, third and fourth residences were also raised.
     "At these adjusted levels, the Bank believes that LTVs will continue to shield the financial system from undue risks going forward," BON said.
     BON began implementing the macroeconomic tool of LTVs in 2017 to mitigate the impact of an overheating housing market on the financial system.
     Since then, BON said, there have been developments that warranted a review of this policy, including a significant slowdown in the economy and a sharp correction in the housing market.