Friday, October 28, 2016

Russia maintains rate to anchor downward inflation trend

    Russia's central bank maintained its key policy rate at 10.00 percent, as it pledged in September, saying "for the trend towards inflation slowdown to become sustainable, according to Bank of Russia estimates, it is necessary to hold the current key rate throughout 2016, with its potential downgrades due in 2017 Q1-Q2."
   Today's guidance by the Bank of Russia is largely identical to its statement from last month when it also said it would maintain its rate this year and first cut it next year to ensure the trend towards a "sustainable decline in inflation to strengthen."
    Russia's inflation rate eased to a 2016-low of 6.2 percent as of Oct. 24, down from 6.4 percent in September and 6.9 percent in August but the central bank said this decline was "to a great extent on the back of temporary factors, while the deceleration in inflation expectations remains unsteady."
    The central bank is fighting to push down inflation toward its target of 4.0 percent by the end of 2017 and by 4.5 percent by October 2017.
    Inflation is being held by back a rise in the exchange rate of Russia's ruble, a good harvest that helped keep food prices in check, while the disinflationary impact of domestic demand is starting to lift, which means there will be a slower decline in non-food prices, the central bank said.
   After plunging in 2014 and 2015, the ruble has risen more than the central bank expected this year and was trading at 62.9 to the U.S. dollar today, up 16.7 percent so far this year.
    The central bank said its guidance from last month aimed to alter the expectations of investors and households who were looking for a faster pace of rate cuts and a slower decline in inflation that it had forecast.
   The central bank's September guidance was party successful - the yield curve shifted upwards and thus maintained tight monetary conditions - but inflation expectations for late 2017 still remain above the central bank's 4.0 percent target.
    The central bank said there are still risks that it may not reach its inflation target due to inflation expectations, a possible weakening of households' propensity to save and higher wages. In addition, the government has not yet decided on budget cuts nor an indexation of public sector wages and social benefits, and volatility in global financial and commodity markets could have a negative impact on the exchange rate and thus inflation expectations.
    "The Bank of Russia estimates that moderately tight monetary conditions do not hinder economic recovery, with structural factors being the main restrictions,' the central bank said.
    While there are signs that Russia's economy is adjusting to a new environment of low oil prices and the fall in the ruble that is resulting in import substitution and growth in some high-tech sectors, overall investment activity is "persistently weak" and several industries are stagnating or declining.
    "Positive trends need time to develop and root," the central bank said, forecasting that overall output this year will decline by 0.5-0.7 percent, though the fourth quarter will witness "slight quarterly growth" and growth next year will be below 1 percent.
    Russia's Gross Domestic Product shrank by an annual 0.6 percent in the second quarter of this year, down from a decline of 1.2 percent in the first quarter for the sixth consecutive quarter of contraction.

Thursday, October 27, 2016

Moldova cuts rate 50 bps, raises 2017 inflation forecast

    Moldova's central bank cut its base rate by another 50 basis points to 9.0 percent, along with its overnight rates, and lowered its 2016 inflation forecast but raised the 2017 forecast.
    The National Bank of Moldova (NBM) has now cut its rate by 1,050 basis points this year as it continues to unwind rate hikes totaling 1,600 points between December 2014 and August 2015 in response to a plunge in the exchange rate of the leu and accelerating inflation.
    The central bank said it now expects inflation to average 6.3 percent this year, down by 0.4 percentage points from its forecast in August, and 4.6 percent next year, up from 4.8 percent.
     Moldova's inflation fell to a 2016-low of 3.0 percent in September from 3.6 percent in August, with the NBM saying higher international food prices and raw materials, along with the volatility in oil prices, are among the external risks to its forecast.
    Further risks of higher inflation stem from the impact of changes to excise duties next year, along with the harvest.
    Moldova's economy continued to recover in the first two months of the third quarter, with exports up by an annual 16.5 percent in July-August, imports up by 4.9 percent, retail trade turnover up by 4.6 percent while volume of services dropped by 4.4 percent, the central bank said.
    In addition, real average wages grew by an annual 8.4 percent in August while the average rate on new loans in leu in June eased by 0.56 percentage points to 13.59 percent.
    Moldova's Gross Domestic Product grew by an annual rate of 1.8 percent in the second quarter of this year, up from 0.8 percent in the first quarter.

Ukraine cuts rate another 100 bps and sees more easing

    Ukraine's central bank cut its key policy rate by another 100 basis points and affirmed that it "will continue to move ahead with monetary easing" to lower borrowing costs and underpin economic growth as long as inflation continues to decelerate.
     The National Bank of Ukraine (NBU) has now cut its rate by 800 basis points this year and 1,600 points since it embarked on an easing campaign in August 2015 in response to a decline in inflationary pressures amid a more stable exchange rate of the hryvnia.
    Although Ukraine's inflation rate has ticked up due to an increase in administered prices, the NBU said this was built into its forecasts and inflationary pressures had continued to ease, illustrated by a continued decline in core inflation.
    "Therefore the inflation targets for 2017 and 2018 (8% +/-2% and 6% +/- 2% respectively) remain within reach and will be supported by the appropriate monetary policy," the NBU said.
    Ukraine's headline inflation rate eased to 7.9 percent in September from 8.4 percent in August and 7.9 percent in July while core inflation fell to a 2016-low of 6.3 percent in September from 7.4 percent in August and 7.9 percent in July.
    By the fourth quarter of this year the central bank expects inflation to meet its year-end target of 12 percent, plus/minus 3 percentage points, with inflation expected to tick up due to higher utility prices.
    Next year inflation is expected to follow "an erratic path," possibly topping 12 percent in the first three quarters due to the rise in administered prices.
    But as this impact wanes, inflation is expected to return to the central bank's target in the fourth quarter of 2017 while core inflation is seen stable around 5-6 percent.
    The supply of foreign exchange exceeded demand in October, allowing the central bank to purchase more foreign exchange to replenish its reserves without braking the trend toward a higher exchange rate, the central bank said.
    Supported by higher foreign direct investment and expected disbursement of funds from the International Monetary Fund (IMF), the NBU forecast that its international reserves will rise o US$17.5 billion by the end of this year, then to $23.1 billion by the end of next year and $27.8 billion by the end of 2018.
     A reduced risk of military conflict is helping encourage new investment, which initially will boost imports of machinery and equipment and thus the current account deficit. Longer-term, however, the overall balance of payments should show a surplus and also lead to higher exports.
    The central bank maintained its forecast of economic growth this year at 1.1 percent but in following years the economy should grow a little slower than earlier expected due to a "worsened external environment."
    In 2017 the economy is seen expanding by 2.5 percent and by 3.5 percent in 2018. In the second quarter of this year Ukraine's Gross Domestic Product grew by an annual rate of 1.4 percent, up from 0.1 percent in the first quarter, reversing eight consecutive quarters of contraction.

Norway maintains rate as economy largely as expected

   Norway's central bank left its key policy rate at 0.50 percent, as expected, saying economic developments have been largely as it forecast in September when it also indicated that the policy rate would be maintained in coming months.
   Norges Bank (NB), which cut its rate by 25 basis points in March, said oil prices had risen more than it had expected while the exchange rate of the krone had also appreciated but overall capacity utilization in the country's economy was broadly as projected in September.
    Inflation, however, had been lower than expected, NB added.
    Norway's inflation rate eased to a lower-than-expected 3.6 percent in September from 4.0 percent in August and 4.4 percent in July.
    In its September monetary policy report, NB forecast 2016 inflation of 3.6 percent, 2017 inflation of 2.6 percent, 2018 inflation of 2.1 percent and 2019 inflation of 1.8 percent.
    The central bank will update its economic forecasts on Dec. 15.

Sweden holds rate but pushes back rate hikes 6 months

    Sweden's central bank left its benchmark repo rate at minus 0.50 percent but pushed back the time frame for maintaining its ultra-easy policy stance by another six months as inflation is forecast to remain below target longer than previously expected despite healthy economic growth.
    Sveriges Riksbank, which cut its rate by 15 basis points in February, also said it was ready to extend the purchase of government bonds beyond the second half of 2016 and such a decision could be taken prior to its next monetary policy meeting in December.
    Sweden's inflation rate has been rising since 2014, helped by a decline in the exchange rate of the krona, but the Riksbank said this rise was now slowing down, illustrating uncertainty over high quickly inflation will rise towards its 2.0 percent target.
    The headline inflation rate in Sweden eased to less-than-expected 0.9 percent in September from 1.1 percent in the previous two months.
    "The Riksbank therefore still has a high level of preparedness to make monetary policy even more expansionary if the upward trend in inflation were to be threatened," the bank said.
    In its latest monetary policy report, the central bank forecast that the repo rate would average minus 0.6 percent in 2017, implying it may trim the rate even more, down from its previous forecast in September of an unchanged rate of minus 0.5 percent.
    For 2018 the Riksbank forecast that the repo rate would rise to an average of minus 0.3 percent, sharply down from its forecast in September of 0.0 percent. For 2019 the rate is seen averaging 0.2 percent.
    The Riksbank also lowered its outlook for inflation, with inflation seen averaging 1.0 percent this year, down from a previous forecast of 1.1 percent, before rising to 1.4 percent in 2017, down from its earlier forecast of 1.8 percent.
    By 2018 inflation is seen returning to the Riksbank's target and averaging 2.2 percent, down from a previous forecast of 2.6 percent, and then rising further to 2.9 percent in 2019.

Wednesday, October 26, 2016

Georgia maintains rate, sees 6% rate in next 2 quarters

    Georgia's central bank left its policy rate unchanged at 6.50 percent, saying past rate cuts were not fully reflected in the economy, but it expects to cut the rate to 6.0 percent over the next two quarters.
    The National Bank of Georgia (NBG) has cut its rate four times this year by a total of 150 basis points and said in September that it aimed to cut the policy rate to 6.0 percent in the "medium term" as demand is still expected to remain weak and inflation expectations indicate that the rate has to be cut further to reach a neutral level.
    But the central bank said there had been an increase in demand for variable rate loans denominated in lari, which had helped improve the transmission mechanism of its monetary policy.
    To further improve this transmission, the central bank wants its loosening to have further effect and decided therefore to maintain the rate this month.
    Georgia's inflation rate eased to 01 percent in September from 0.9 percent in August and the central bank expects inflation to return to its target in the second half of 2017.


Tuesday, October 25, 2016

Hungary keeps base rate, cuts overnight, RR rates

    Hungary's central bank maintained its benchmark base rate rate at 0.90 percent, as widely expected, but continued its policy of easing overall monetary conditions by lowering the overnight lending rate by 10 basis points and cutting the required reserve ratio by 100 basis points..
    The National Bank of Hungary (NBH) last cut its key rate in May but is now limiting the use of its main policy tool, the 3-month deposit facility, to encourage banks to buy government debt and offer cheaper loans to consumers and businesses.
    Last month the NBH lowered the total limit on the use of its 3-month deposit facility to 900 billion forint by the end of 2016, pushing out at least 200-400 billion forints from its facility.
     While cutting the overnight lending rate to 1.05 percent to "increase the banking system's liquidity and ease monetary conditions further," the central bank left the overnight deposit rate at minus 0.05 percent. This resulted in a narrowing of the interest rate corridor so rates on one-week central bank loans fell by 5 basis points to 1.0 percent, the NBH said.
    By cutting the reserve requirement to 1.0 percent from 2.0 percent as of Dec. 1, the central bank expanded the freely available liquidity in the banking system by 170 billion forint.
    "The Bank aims to ease monetary conditions and provide a corresponding degree of support to the economy through a decline in money market rates," the central bank said, adding it considers the limit on its three-month deposit stock and potential future changes "an integral part of monetary policy instruments."
    In a separate move, the central bank said it was offering to accept 150 billion forints of funds from banks in its 3-month deposit facility. At the last unlimited tender in September, banks deposited 687 billion forints in the facility.

Sunday, October 23, 2016

This week in monetary policy: Hungary, Georgia, Sweden, Norway, Israel, Ukraine, Moldova, Fiji and Russia

    This week (October 23 through October 29 central banks from 9 countries or jurisdictions are scheduled to decide on monetary policy: Hungary, Georgia, Sweden, Norway, Israel, Ukraine, Moldova, Fiji and Russia.
    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 23 - OCT 29, 2016:
COUNTRY       DATE           RATE      LATEST        YTD     1 YR AGO    MSCI
HUNGARY 25-Oct 0.90% 0 -45 1.35%       EM
GEORGIA 26-Oct 6.50% -25 -150 7.00%
SWEDEN 27-Oct -0.50% 0 -15 -0.35%       DM
NORWAY 27-Oct 0.50% 0 -25 0.75%       DM
ISRAEL 27-Oct 0.10% 0 0 0.10%       DM
UKRAINE 27-Oct 15.00% -50 -700 22.00%       FM
MOLDOVA 27-Oct 9.50% -50 -1,000 19.50%
FIJI 27-Oct 0.50% 0 0 0.50%
RUSSIA 28-Oct 10.00% -50 -50 -100       EM

Thursday, October 20, 2016

ECB maintains rates as growth risks tilted to downside

    The European Central Bank (ECB) left is key policy rates steady, as widely expected, but raised the prospect of changing its policy measures in December by underscoring that risks to economic growth "remain tilted to the downside" and it will continue to use all available instruments to ensure that inflation continues to rise.
    The ECB, which in March cut its benchmark refinancing rate to zero, confirmed that monthly asset purchases of 80 billion euros were still intended to run until the end of March 2017, or beyond if necessary to ensure that inflation is moving toward the target of just below, but close to 2 percent.
    But ECB President Mario Draghi said the ECB remained "committed to preserving the very substantial degree of monetary accommodation," a sign the ECB may either extend its asset purchases beyond March next year or adjust it to encompass other securities or loosen some of its restrictions.
     In December the ECB will update its economic forecasts through to 2019 while the governing council will also hear from committees about the options for ensuring that its purchase program is proceeding smoothly, addressing concerns the ECB is running out of bonds to buy.
    Draghi said the euro area economy in the third quarter had continued to expand at a rate that was "around the pace" of the second quarter and further ahead growth should proceed at a "moderate but steady pace."
    In the second quarter the euro zone economy grew by 0.3 percent from the first quarter for annual growth of 1.6 percent, down from 1.7 percent in the first quarter.
    In September the ECB revised upwards its 2016 growth forecast to 1.7 percent from 1.6 percent, but lowered its outlook for 2017 growth to 1.6 percent from 1.7 percent and its 2017 forecast to 1.6 percent from 1.7 percent.
    Domestic demand will continue to be supported by the ECB's easy policy and largely neutral fiscal policy in 2017 but Draghi said the recovery was still being dampened by subdue foreign demand, the necessary adjustments of balance sheets in a number of sectors and the sluggish pace of structural reforms, which he once again called on governments to accelerate to reduce unemployment and boost the potential growth.
    "Structural reforms are necessary in all euro area countries," said Draghi.
    Inflation in the euro area rose to 0.4 percent in September from 0.2 percent in August.
    In its latest forecast, the ECB expects inflation to average 0.2 percent this year, 1.2 percent in 2017 and 1.6 percent in 2018.

Turkey maintains repo and overnight rate on low lira

    Turkey's central bank left its benchmark one-week repo rate steady at 7.50 percent but surprised financial markets by pausing in its policy of lowering the overnight funding rate, saying "recent developments in exchange rates and other cost factors restrain the improvement in the inflation outlook and thus necessitate the maintenance of a cautious monetary policy stance."
    The Central Bank of the Republic of Turkey (CBRT) has cut the overnight funding rate by 250 basis points to 8.25 percent since March, most recently last month, as part of a simplification of its monetary policy framework and efforts to stimulate demand and economic growth.
    But the benchmark rate, the one-week repo rate, has been maintained since February 2015 as the central bank tries to push down inflation.
    "The Committee stated that the direction and the timing of the next step in the monetary policy simplification process will be data dependent," the central bank said, adding its usual guidance that it will maintain a cautious policy stance and the outlook for inflation will determine its decisions.
    Turkey's headline inflation rate eased to 7.28 percent in September from 8.05 percent in August as food prices declined for the first on a monthly basis since 2003. The CBRT has forecast year-end inflation of 7.5 percent.
     While the exchange rate of the lira has weakened this year - on Tuesday it hit a record low of 3.11 to the U.S. dollar - it rose in response to the central bank's decision today.
    The lira was trading at 3.06 to the U.S. dollar shortly after news of the CBRT's decision to maintain rates, up from 3.07. But it is still down 4.6 percent compared with the the start of this year.
    Turkey's economy decelerated in the third quarter, the CBRT said, noting the decline in tourism revenue and moderate consumer lending. But the central bank said it expected domestic demand to start to recover in the fourth quarter, helped by recent supportive measures and incentives.
   Turkey's Gross Domestic Product grew by an annual rate of 3.1 percent in the second quarter, down from 4.7 percent in the first quarter.

Indonesia cuts rate another 25 bps, trims growth forecast

    Indonesia's central bank cut is new benchmark interest rate by 25 basis points for the second month in a row to stimulate domestic demand, including credit, to stimulate domestic demand at a time that inflation will remain close to the floor of its target range and economic growth is slightly weaker than expected.
     Bank Indonesia (BI) cut its BI 7-day Reverse Repo Rate (BI 7-day RR Rate) to 4.75 percent from 5.0 percent, brining the total cut in that rate to 50 basis points following the cut in September.
    BI adopted the 7-day rate as its new benchmark rate in August to improve the transmission of its monetary policy decisions to money markets. Prior to August BI cut its previous benchmark rate, the BI rate, four times from January through June by a  total of 100 points.
    Indonesia's inflation rate rose to 3.07 percent in September from 2.79 percent in August but BI reiterated that inflation is expected to fall towards the floor of its target corridor of 3 - 5 percent.
    Indonesia's economy in the third quarter was slightly weaker than BI had expected and the impact of government spending is now seen as "somewhat limited" as spending is adjusted in the second half of this year.
    Sluggish world trade has also undermined the country's exports while the rupiah's exchange rate has continued to appreciate, making the country's exports less competitive.
    Economic growth this year is therefore expected to be around the lower end of the 4.9 percent to 5.3 percent range that BI has forecast, a slight downgrade in its forecast.
    In August BI cut its growth forecast to 4.9-5.3 percent  from a previous 5.0-5.4 percent and last month confirmed that expectation.
    Indonesia's Gross Domestic Product grew by an annual rate of 5.18 percent in the second quarter, up from 4.91 percent in the first quarter, but BI said consumption in the third quarter had remained limited and private investment, particularly non-construction investment, had remained weak.
     After being hit hard in 2013 - the year of the "taper tantrum" when the rupiah fell by 21 percent - the rupiah continued to depreciate until October 2015.
    Since then it has been rising on positive sentiment about the economy along with a tax amnesty that encouraged Indonesians abroad to repatriate funds.
    The rupiah was trading at 13,003 to the U.S. dollar today, up 6.1 percent this year.