Monday, October 15, 2018

Kazakhstan raises rate 25 bps on risks of higher inflation

      Kazakhstan's central bank raised its base rate by 25 basis points to 9.25 percent due to an increase in the risks of higher inflation from the tenge's depreciation, with future decisions about the base rate dependent on how inflation compares with the bank's target.
      It is the first rate hike by the National Bank of Kazakhstan (NBK) since February 2016 when the base rate was raised to 17.0 percent to curb rising inflation which hit 17.7 percent in July that year.
      In May 2016 the NBK began lowering the rate and remained in an easing stance until June this year when it switched to a neutral policy stance.
       Between May 2016 and June 2018 the NBK cut its base rate by a total of 800 basis points, including four cuts this year by a total of 125 points.
      But in September the central bank said inflation was falling slower than it had expected while economic activity was continuing to strengthen and the tenge was depreciating.
      While the central bank said it was maintaining the current interest corridor of 1 percentage points plus/minus around the base rate, it also said it was considering narrowing the boundaries of the corridor to improve the operational effectiveness of its monetary operations so the tenge overnight rate, TONIA, will remain within the target corridor and converge to the target rate.
       Headline inflation in Kazakhstan rose to 6.1 percent in September from 6.0 percent in August - a level the central bank described as moderate - and is forecast to remain within the 2018 inflation target of 5.0 - 7.0 percent.
       In 2019 the central bank said it expects inflation to "smoothly enter the new corridor" of 4.0 - 6.0 percent and remain close to the upper limit of 6.0 percent.
       An increase in exchange rate volatility had triggered a rise in inflationary expectations to 6.4 percent in September from 5.6 percent in July and domestic demand is continuing to expand due to rising incomes.
       An increase in the minimum wage will add inflationary pressure while a economic activity remains above the country's potential, the NBK said, adding the higher base rate will help increase the demand for tenge assets and help keep monetary conditions close to neutral.
       In April this year the tenge was hit by worries over a fallout of new U.S. sanctions on Russia and since then it has continued to depreciate as U.S. interest rates rise.
      Today the tenge was trading at 368.3 to the U.S. dollar, down 9.6 percent this year.
       In August 2015 the tenge plunged following the central bank's move to a floating exchange rate regime in response to capital outflows and the conversion of many tenge bank deposits to foreign currency. Oil accounts for about 60 percent of Kazakhstan's exports and over 10 percent of its Gross Domestic Product.


Sunday, October 14, 2018

This week in monetary policy: Kazakhstan, Hungary, South Korea and Chile

    This week - October 14 through October 20 - central banks from 4 countries or jurisdictions are scheduled to decide on monetary policy: Kazakhstan, Hungary, South Korea 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, 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.

OCT 14 - OCT 20, 2018:
COUNTRY                   DATE                     RATE                LATEST                    YTD              1 YR AGO
SOUTH KOREA18-Oct1.50%001.25%
CHILE 18-Oct2.50%002.50%

Thursday, October 11, 2018

Singapore tightens policy slightly for 2nd time this year

     Singapore's central bank tightened its monetary policy stance for the second time this year, as expected, saying "the economy is likely to remain on its steady expansion path in the quarters ahead while inflation "will experience modest but continuing pressures, before leveling off at just below 2% over the medium term."
      As in April, the Monetary Authority of Singapore (MAS) increased slightly the slope of the Singapore dollar's policy band while maintaining the width of the band and the midpoint at which it is centered, a move that is consistent with a modest and gradual appreciation to ensure price stability.
     Unlike most central banks that target consumer price inflation directly, MAS targets the value of the Singapore dollar against a basket of currencies as a way to control inflation.
      Singapore's economy has evolved largely as MAS forecast in April and said the economy was likely to expand at "a slower but steady pace for the rest of this year and in 2019," slightly above the economy's potential.
      Singapore's economy expanded by an annual 2.6 percent in the third quarter of this year, down from 4.1 percent in the second quarter, as the contribution of manufacturing has waned - reflecting the maturing of the global electronics cycle - while the services sector has remained firm, MAS said.
      For 2018 MAS forecast gross domestic growth in the upper half of the 2.5 - 3.5 percent forecast and then moderate slightly next year while a small positive output gap persists.
       Core inflation, which excludes accommodation and private road transport was steady at 1.9 percent in July and August and in coming quarters MAS expects inflation to increase due to higher oil and food prices to around 2.0 percent.
       For 2018 MAS forecast core inflation in a range of 1.5 to 2.0 percent and then average 1.5 to 2.5 percent in 2019.

Peru maintains rate and expansive policy stance

     Peru's central bank left its monetary policy rate at 2.75 percent, saying its board considers it appropriate to maintain an expansive policy stance until it is confident inflation will converge to its target and that inflation expectations are anchored at a level where economic activity is close to the country's potential.
      The Central Reserve Bank of Peru (BCRP), which has maintained its rate since cutting it in March, added inflation is projected to remain within the target range in October and then converge to 2.0 percent in the short term.
      Between May 2017 and March this year BCRP cut its key rate by 150 basis points.
      Peru's inflation rate rose to 1.28 percent in September from 1.07 percent in August, within the central bank's target range of 1.0 - 3.0 percent.
      Some indicators of economic activity showed signs of a temporary drop in dynamism overall the indicators show a gradual recovery and business expectations were optimistic in September.
      Last month BCRP President Julio Velarde signaled that interest rates would likely not be raised until next year unless an expectedly strong economy pushes up prices.
      Peru, the world's second largest copper producer,  has been affected by lower copper prices and in its latest quarterly report the BCRP lowered its forecast for 2019 economic growth to 4 percent from a previous forecast of 4.2 percent.
      The 2018 growth forecast was maintained at 4.0 percent and in the second quarter of this year Peru's gross domestic product grew by an annual 5.4. percent, up from 3.1 percent in the first quarter and the fastest growth rate since the fourth quarter of 2013.

Monday, October 8, 2018

Israel holds rate as BOI staff push back rate hike to Q1

      Israel's central bank left its key interest rate steady at 0.10 percent, saying the "forces supporting an increase in inflation still prevail" while the bank's economists pushed back their forecast for the first rate hike in seven years to early next year.
     The Bank of Israel (BOI), which is slowly moving towards raising its rate for the first time since June 2011, added the inflationary environment had not changed markedly since the last monetary policy meeting and a possible sharp rise in in the shekel's exchange rate still presents the main risk to inflation becoming entrenched within its target.
      BOI's monetary committee repeated its guidance that it would maintain the accommodative policy "as long as necessary in order to entrench the inflation environment within in the target range."
     Israel's inflation rate eased to 1.2 percent in August from 1.4 percent in July but was still within the BOI's target range of 1.0 - 3.0 percent.
      In August five of the monetary committee members voted to maintain the rate - it has been steady since March 2015 - while one member voted for a 15 basis point rate hike, similar to the previous four decisions.
      According to the August minutes, the committee believes there is room to prepare markets for the possibility of higher rates but any increase in interest rates before inflation is entrenched within the target range may delay this process and ultimately slow the path of raising rates.
       Taking note of the recent decline in inflation, the central bank's research department pushed back its forecast for the BOI to raise its rate to the first quarter of next year to 0.25 percent from July's forecast for a rate hike in the fourth quarter of this year.
     "The deferral is slight because we assess that the moderate inflation of recent months is only transitory, and that the inflation rate will continue to increase at a pace similar to our assessment in July," the bank's research department said.
     By the third quarter of 2019 BOI staff expect the rate to be raised one more time to 0.5 percent.
     The forecast for inflation was also lowered slightly in light of lower than expected inflation and the rise in the shekel that was not expected.
     Inflation is forecast to be 1.5 percent by the end of 2019 but only 0.8 percent at the end of this year, down from 1.2 percent forecast in July.
     The forecast for economic growth was unchanged, with gross domestic product seen expanding 3.7 percent this year, up from 3.5 percent last year, and 3.6 percent in 2019, up from 3.5 percent.
     After falling from January to mid-August, Israel's shekel rose against the U.S. dollar until late September before easing again.
     Today it slipped in response to the bank's statement and was trading at 3.64 to the dollar, down 4.4 percent since the start of this year.

Serbia maintains rate, raises 2018 growth forecast

     Serbia's central bank left its key policy rate steady, as expected, but raised its forecast for economic growth and confirmed that it expects inflation to remain within its target tolerance band over the next two years.
      The National Bank of Serbia (NBS), which last lowered its rate in April after a 5-year easing cycle, said inflation had returned to its target range in August after accelerating for four months in a row, driven by rising demand and inflation expectations are now anchored around the 3.0 percent target both one and two years ahead.
     Serbia's inflation rate rose to 2.6 percent in August after hitting a 2018 low of 1.1 percent in April. The NBS targets inflation of 3.0 percent within a target range of plus/minus 1.5 percentage points.
      The central bank has cut its rate by a total of 50 percent points this year and by a total of 8.75 percentage points since May 2013 when it embarked on a easing cycle.
     Boosted by strong demand, investments and exports, Serbia's economy has "risen vigorously" since the beginning of this year, at the highest rate in the past 10 years, helped by the rate cuts, the central bank said.
     The NBS expects growth this year to exceed 4.0 percent, up from its September forecast of around 4 percent, with a significant contribution from a rise in foreign direct investment that will ensure "vibrant growth in manufacturing exports going forward," NBS said.
     Serbia's economy expanded by a higher-than-expected 4.8 percent year-on-year in the second quarter of this year, down from 4.9 percent in the first quarter.
     Earlier this month the International Monetary Fund raised its 2018 growth forecast to 4.2 percent and from 3.5 percent and projected 2019 growth of 3.5 percent.
     As in recent months, the NBS said global developments are still calling for "caution" in monetary policy due to volatile oil prices and monetary policy tightening by the U.S. Federal Reserve and a wind-down of quantitative easing by the European Central Bank (ECB) that could affect capital flows to emerging markets.
     "Besides, growing protectionism in international trade has dampened investor mood and stirred uncertainties in international financial market," NBS said, adding Serbia's economy is resilient due to potential negative international effects owning to its macroeconomic fundamentals.
      Serbia's dinar has been under upward pressure in the last year, with the central bank reportedly buying over 1.6 billion euros to hold it down. The NBS operates a managed float exchange rate regime.
       The dinar was trading at 118.6 against the euro today, largely unchanged from 118.9 at the start of the year.

Sunday, October 7, 2018

This week in monetary policy: Serbia, Israel, Argentina, Peru and Singapore

    This week - October 7 through October 13 - central banks from 5 countries or jurisdictions are scheduled to decide on monetary policy: Serbia, Israel, Argentina, Peru and Singapore.
    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.

OCT 7 - OCT 13, 2018:
COUNTRY                   DATE                     RATE                LATEST                    YTD              1 YR AGO
ARGENTINA 1)9-Oct                     n/a                      n/a                       n/a27.75%
SINGAPORE12-Oct                     n/a                      n/a                       n/a                       n/a
1) From Oct. 1 Leliq rate changes daily

Friday, October 5, 2018

India shifts to calibrated tightening but maintains rate

      India's central bank surprised most economists by keeping its policy rate steady after two rate hikes earlier this year but shifted its policy stance to "calibrated tightening" from neutral while lowering its forecast for inflation.
      The Reserve Bank of India (RBI), which had raised its repo rate by 50 basis points to 6.50 percent following hikes in June and August, underscored the uncertainties surrounding the outlook for economic growth and inflation, pointing to escalating trade tensions, volatile and rising oil prices and tighter global financial conditions.
       Illustrating this uncertainty, the bank's monetary policy committee was again split in its decision - as in August - with 5 members, including the governor, voting to maintain the rate and Chetan Ghate voting for a 25-point rate hike.
      The MPC was also split in deciding the policy stance, with 5 members voting for changing to calibrated tightening while Ravindra Dholakia voted to keep the stance neutral.
      "The inflation outlook calls for a close vigil over the next few months, especially because the output gap has virtually closed and several upside risks persist," RBI said, adding the shift to a calibrated tightening stance was in line with its objective of reaching inflation of 4.0 percent, within a band of plus/minus 2 percentage points, while supporting growth.
       The forecast for consumer price inflation, including the impact of housing rent allowances for central government employees, was lowered to a range of 3.9 to 4.5 percent for the second half of the current 2018-19 financial year, which began April 1, from 4.8 percent forecast in August.
       For the first quarter of 2019-20, RBI forecast inflation of 4.8 percent, with risks somewhat to the upside, from an earlier 5.0 percent.
       Despite the fall in the rupee's exchange rate, India's inflation rate has been falling in the last two months and fell to 3.69 percent in August from 4.17 percent in July due to lower food prices.
      "Actual inflation outcomes, especially in August, were below projections as the expected seasonal increase in food prices did not materialize and inflation excluding food and fuel moderated," RBI said.
      The RBI said global economic activity had remained resilient in recent months despite trade tensions but was now becoming uneven and global trade was weakening as reflected in export orders and automobile production and sales.
      India's economy has been expanding strongly and gross domestic product growth hit a 9-quarter high in the second quarter of 2018, or the first quarter of financial 2018-19, of a higher-than-expected 8.2 percent, boosted by the government's focus on roads and affordable housing.
      Looking ahead the RBI maintained its growth forecast for 2018-19 at 7.4 percent but trimmed its forecast for growth in the first quarter of 2019-20 to 7.4 percent from the August forecast of 7.5 percent, mainly due to the strong base effect.
      India's rupee, which has been deprecating this year, as most other emerging market currencies, weakened to new record lows in response to the RBI's decision to 74.17 per U.S. dollar.
      Shortly after it bounced back and was trading at 73.87 to the U.S. dollar, down 13.6 percent since the start of this year.

Wednesday, October 3, 2018

Uganda raises rate 100 bps on growing inflation pressure

     Uganda's raised its Central Bank Rate (CBR) by 100 basis points to 10.0 percent as inflationary pressures are now higher than expected due to rapidly rising oil prices, a weaker exchange rate of the shilling and an array of indirect taxes on mobile money transactions and voice and messaging services over the internet.
     The Bank of Uganda (BOU), which had cut its rate in February by 50 basis points to boost economic growth, said a "modest" tightening of monetary policy was warranted to keep inflation close to its 5.0 percent target.
     Uganda's inflation rate eased slightly to 3.7 percent in September from 3.8 percent in August due to lower food prices but BOU noted core inflation had jumped to 3.9 percent in September from 0.8 percent in June due to higher services prices.
     Services prices have risen in response to the Over-The-Top (OTT) tax, a 200 shilling daily tax on voice and messaging services by such providers as Facebook, WhatsApp, Twitter and Instagram. The tax on social media from July 1 was imposed to curb gossip among its users. Earlier the government passed a 1 percent excise duty on mobile money transactions.
      "Higher fuel prices and strong domestic demand could push services inflation higher in the remaining part of 2018," BOU said.
      The central bank raised its forecast for core inflation to peak in the range of 6.5 to 7.5 percent in the second half of 2019 unless it cut the rate now. In the first half of 2020 core inflation is expected to ease and stabilize around 5 percent, with the positive output gap expected to the key inflation driver.
      Economic activity in Uganda has been solid since the second half of last year, with the BOU's composite index of economic activity suggesting economic growth in the current 2018/19 fiscal year, which began July 1, of about 6.5 percent.
      Uganda's economy expanded by 6.4 percent year-on-year in the first calendar quarter of 2018, unchanged from the previous quarter.
      A key risk to the inflation outlook stems from the exchange rate, which remains vulnerable to tighter global financial conditions and stronger domestic demand. Food prices are not seen as a major risks but remain dependent on weather and therefore uncertain.
      The shilling has been depreciating steadily since early 2017 and fell sharply in June before bouncing back. Today the shilling was trading at 3,815 to the U.S. dollar, down 4.8 percent this year.


Tuesday, October 2, 2018

Jamaica maintains rate as private sector credit expands

     Jamaica's central bank left its policy rate steady at 2.0 percent for the second time, saying the accommodative monetary policy aims to reinforce signs of rising growth of credit to the private sector with economic activity expected to help inflation return to the target.
     The Bank of Jamaica (BOJ), which in August said it would ease its policy further if private sector credit didn't continue to expand, added it expects the increasingly accommodative conditions in the domestic market to lead to slightly higher pace of growth in credit than earlier expected.
     The BOJ, which has cut its benchmark overnight deposit rate by 125 basis points this year - most recently in June - said domestic demand is likely to strengthen gradually while economic growth, while modest, is accelerating, supported by faster credit growth.
     Jamaica's economy expanded by a faster-than-expected 2.2 percent year-on-year in the second quarter, up from 1.4 percent in the first quarter, net international reserves are above the level deemed adequate, market interest rates are at record lows and fiscal performance continues to be strong.
     Since July 2017, when BOJ adopted the overnight deposit rate as its policy rate, it has lowered the rate by a total of 175 basis points.
     Credit to the private sector grew by an annual 16.7 percent in July, or 13.1 percent in real terms, compared with growth of 15.9 percent in June and 11.2 percent in July 2017.
     The BOJ said the decision to keep the rate steady reflected its view that inflation will be within the 4.0 to 6.0 percent target range by the March 2019 quarter and then rise to the middle of the target.
     Jamaica's inflation rate has been rising in the last three months to 3.9 percent in August from a 2018 low of 2.8 percent in June, and BOJ's outlook for inflation includes the impact of the faster-than-expected fall in the exchange rate of the Jamaican dollar in April and May.
     At the end of April the Jamaican dollar began falling before stabilizing in September. Since then it has appreciated to trade at 134.3 to the U.S. dollar today, up 2.4 percent since early September but down 7.7 percent since the start of the year.
     Last month International Monetary Fund staff and Jamaica's government reached agreement on the fourth review under its stand-by arrangement from November 2016 that will make an additional US$226 million available, bringing the total accessible credit to about $1.2 billion.
     Jamaica still considers the credit, which will total $1.64 billion, as precautionary. As part of the agreement, Jamaica is expected to approve a new central bank act that establishes BOJ as an independent central bank with price stability as its primary mandate.
     The IMF's executive board is tentatively scheduled to decide on the latest agreement in November.
     In its statement, the IMF said Jamaica was implementing its program, with the government's primary surplus exceeding the target by 0.7 percent of Gross Domestic Product.
    The IMF forecast economic growth in the 2018/19 fiscal year of 1.4 percent and then rise to around 2 percent in the medium term, supported by mining and construction.

Monday, October 1, 2018

Argentina launches new policy with 500 bps rate hike

     Argentina's central bank launched its new monetary policy framework by raising its Leliq policy rate by another 500 basis points to 65.0 percent in a determined effort to stamp out inflation that is expected to remain high in coming months as the recent fall in the peso boosts import prices.
      As part of the revised agreement between Argentina's government and the International Monetary Fund (IMF), the Central Bank of the Argentine Republic (BCRA) scrapped its inflation targeting regime and replaced it with a target of zero growth in nominal terms in the monthly average of the monetary base from October 1 until June 2019.
     On Friday, when BCRA's monetary policy committee (Copom) began implementing its new monetary policy, the rate on Leliq 7-day liquidity notes rose to 65 percent from 60 percent. On Aug. 30 the Leliq rate was raised 150 bps to 60 percent under its defunct inflation targeting regime.
     To reinforce the contractive nature of its new policy and prepare for the elimination of the stock of 35-day Lebac notes, BCRA also raised the reserve requirement for major banks by a further 300 basis points to what local media reported as 44 percent. The requirement has been raised several times in recent months.
      The central bank's new policy framework includes limited intervention in the foreign exchange, mainly to prevent excessive fluctuations in the peso. In Argentina the exchange rate of the peso plays a major role in determining inflation expectations.
     "This measure we are taking implies a significant monetary contraction that is necessary to recover nominal stability and reduce inflation expectations," new BCRA Governor Guido Sandleris said in his inaugural press conference on Sept. 26.
     Sandleris, who has worked for the Minneapolis Federal Reserve, Chile's central bank and the International Monetary Fund (IMF), replaced Luis Caputo as the third central bank president since Mauricio Macri won the presidential election in December 2015.
      Under Federico Sturzenegger, the first governor under Macri, BCRA in September 2016 formally adopted an inflation targeting regime, a system used by most central banks worldwide.
      But Sandleris acknowledged Macri's government had made mistakes by underestimating the difficulty of correcting past imbalances and the inflation targeting regime had not led to lower inflation, the central bank's primary objective.
      Argentina's inflation rate has risen steadily this year but remains below 40.5 percent that was set in April 2016. In the following months and throughout 2017, inflation decelerated.
       But this trend came to an abrupt halt but in May this year as the peso plunged, setting the stage for the US$50 billion, 3-year support agreement with the IMF in June.
     Argentina's inflation rate accelerated to 34.4 percent in August and BCRA expects it to exceed 40 percent in coming months as prices continue to adjust to the fall in the peso in August.
      BCRA picked the monetary base - the sum of all currency in circulation and banks' deposits with the central bank - as its new nominal anchor because this monetary aggregate is its most direct control and therefore strengthens its commitment to comply with the goal.
      Targeting the monetary base implies a significant monetary contraction as it recently has been growing a bit over 2.0 percent a month and now will no longer grow. With inflation continuing to rise, it will lead to a strong contraction in the monetary base in real terms.
       Data on the monetary base is published daily so Sandleris said anyone can verify the central bank is living up to its commitment that the monthly average of the monetary base doesn't grow.
       During December and June, when demand for money rises, BCRA will adjust its target to avoid excessive monetary contraction.
       Although BCRA is formally using a floating exchange rate regime without intervention, it will use zones of intervention and non-intervention to provide transparency and predictability. 
      The non-intervention zone is initially set between 34 pesos and 44 pesos per U.S. dollar, with this zone adjusted 3 percent per month until end-2018. BCRA considers this range as adequate for exchange rate parity and will adjust the zone next year.
      Within this zone, BCRA will not operate in currency market but instead focus on maintaining zero growth in the monetary base through auctions of Liquidity Letters (Leliq), which means the rate will fluctuate daily.
      "The monetary policy rate is defined as the average rate resulting from these operations, calculated on a daily basis," BCRA said on Friday, adding the policy rate thus will be determined by supply and demand for liquidity, and comply with the commitment to zero growth in the base.
      If the peso depreciates beyond the upper limit of the non-intervention zone, BCRA will sell up to US$150 million a day to prevent what it describes as "unjustified fluctuations."
     The pesos purchased in such intervention will be withdrawn from circulation, reinforcing the  contraction of the monetary base.
      In the event the peso rises rapidly to less than 34 to the dollar - a sign of confidence and demand for pesos -  the central bank may buy international reserves and decide how much to sterilize these purchases according to the economy's conditions.
      "Only in the face of this signal of increased demand for money, can BCRA increase the monetary base above the 0% growth target, which will be supported by the increase in reserves," BCRA said.
      In light of Argentina's commitment to stronger reform measures, the IMF on Sept. 26 increased its support of Argentina by US$7 billion to $57.1 billion through 2021 and front loaded the support so $19 billion were made available through the end of 2019 to calm fears the country couldn't meet its obligations.
      Importantly, these funds are no longer considered precautionary but will actually be used to support the government budget.
      In addition to strengthening its commitment to reduce inflation, Macri's government has undertaken to have a balanced budget by 2019, one year earlier than previously planned, and then a one percent primary budget surplus in 2020 to start reducing public debt.
      The currency market greeted the revised IMF agreement and Sandleris' arrival by selling off the peso, which ended last week at a new record low of 41.30 to the U.S. dollar.
      Today the peso firmed slightly to trade at 40.8 to the dollar and is down 54 percent this year.