Russia raises rate 4th time, will consider more hikes

     Russia's central bank raised its key interest rate for the fourth time to contain accelerating inflation and inflation expectations and said it would consider further rate hikes to prevent inflation from exceeding its target for a long period.

     The Bank of Russia raised its key interest rate by 1 percentage point to 6.50 percent and has now raised it 2.25 percentage points this year following earlier hikes in March, April and June.
     Central banks worldwide have now raised their key interest rates 32 times this year - including 5 times in July - to contain growing inflationary pressure from rising commodity prices and strong consumer demand as economies bounce back from lockdowns and restrictions during the COVID-19 pandemic.

     So far 19 central banks have raised rates, mainly in emerging and developing economies where inflation is more sensitive to higher commodity prices. Central banks in emerging markets, such as Russia and Brazil, for example, account for 12 of this year's rate hikes.

     Another reason for emerging market central banks to react quickly to rising inflation is to protect the value of their currencies that may come under attack, further boosting import prices and inflation, especially when developed market central banks begin to tighten their policy.

     Today's rate hike by the Russian central bank was widely expected by economists following the rise in June inflation to a higher-than-expected 6.5 percent, the highest since August 2016, and comments by the bank's governor, Elvira Nabiullina, that a rate hike of up to 1 percentage point would be considered.

      Unlike many other central banks, such as the U.S. Federal Reserve, that view the rise in inflation as transitory, Nabiullina doesn't see the rise as merely temporary but something that has to be dealt with by swift rate hikes as it reflects a surge in demand that could have longer-lasting consequences.

     The Bank of Russia estimates its economy already passed its pre-pandemic level in the second quarter of this year and taking into account high inflation expectations, this has significantly shifted the balance of risks towards pro-inflationary ones and may cause inflation to exceed the bank's target for a longer period.

     "If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate increases at its upcoming meetings," the bank said.

     The central bank, which targets inflation of 4.0 percent, now sees inflation averaging 6.0-6.2 percent this year, up from 3.4 percent last. year and up from April's forecast of 5.4-5.8 percent.

     Next year inflation is seen averaging 4.1-4.9 percent, up from the previous forecast of 4.0-4.2 percent, before returning to the target in 2023.

     The central bank's key rate is seen averaging 5.5-5.8 percent this year and then 6.0-7.0 percent next year before easing to 5.0-6.0 percent in 2023. This is up from April's forecast for the key rate to average 4.8-5.4 percent this year and 5.3-6.3 percent next year.

     "Inflation is developing above the Bank of Russia's forecast," the bank said, adding as of July 19 the annual rate was still 6.5 percent.

     "This largely reflects the fact that steady growth in domestic demand exceed production expansion capacity in a wide range of sectors," the bank said, adding in such a situation businesses find it easier to pass on higher costs to prices.

     Inflation expectations in households is also continuing to rise and price expectations by businesses is at multi-year highs.

     "The dominating influence of proinflationary factors could lead to a more substantial and prolonged deviation of inflation upwards from the target," the bank said, adding its rate hike aims to constrain this risk and return inflation to its target.

     With the economy recovering, inflation pressures from the labour market is also intensifying and wide range of industries are seeing a shortage of workers due to remaining restrictions on labour migrants.

     The central bank raised its forecast for economic growth this year to 4.0-4.5 percent from April's 3.0-4.0 percent and compared with a contraction of 3.0 percent last year.

     For 2022 the Bank of Russia expects growth of 2.0-3.0 percent, down from its earlier forecast of 2.5-3.5 percent, with that rate continuing in 2023.

Ukraine raises rate 3rd time and sees further hike

     Ukraine's central bank raised its key interest rate for the third time this year and expects to raise it further, saying this monetary tightening is necessary to return inflation to its target by 2022.
     The National Bank of Ukraine (NBU) raised its key policy rate by another 50 basis points to 8.0 percent and has now raised it by 200 points this year following earlier hikes in March and April.

     Last year the central bank slashed its rate 5 times and by 7.50 percentage points to cushion the economy from the COVID-19 pandemic but with economic activity recovering and prices rising, NBU is slamming on the brakes to prevent inflation accelerating further.

     "The NBU's forecast envisages that the key policy rate will be raised further, to 8.5%, and maintained at that level until Q2 2022, with a view to brining inflation back to its 5% target in 2022, and keeping inflation expectations in check," said the bank.

     If additional pro-inflationary risks materialize, the central bank said it was ready to continue deploying monetary tools to ensure inflation returns to its target.

     Inflation in Ukraine has been above the bank's target of 5.0 percent, plus/minus 1 percentage point, every month this year and the central bank expects it to rise further to over 10 percent in coming months from 9.5 percent in June before it begins to ease and return to the target in second half of 2022.

     "With global prices surging and demand recovering further, the NBU has revised its 2021 inflation forecast from 8% to 9.6%," the bank said.

     The rise in inflation is partly due to a temporary rise in global food and energy prices but NBU also said underlying inflationary pressures have intensified significantly due to strong consumer demand and rising production costs, particularly wages.

     Robust consumer demand and improving trade conditions will help Ukraine's economy make up for any losses sustained from lockdowns to contain the virus during the winter and spring, the central bank said, maintaining its forecast for economic growth this year of 3.8 percent and 4.0 percent in 2022 and 2023.

    In addition to the rate hike, the bank's board said it was taking additional measures to tighten monetary policy by continuing to phase out its anti-crises measures, noting liquidity in the banking system is high and exceeded 200 billion hryvnia as of July 22.

     Last month the NBU decided to begin phasing out stimulus measures from last year and today decided to set the rate on refinancing loans to banks at the policy rate plus 1 percentage point and lower the planned amount of daily interventions to purchase foreign exchange to US$5 million from $20 million.

    "If financial markets suffer no major shocks, long-term refinancing and interest rate swaps will be suspended from 1 October 2021," the NBU said, adding it will also consider reducing the terms of regular refinancing loans in September. 

This week in monetary policy: China, Mozambique, Costa Rica, Indonesia, Uzbekistan, Ukraine, ECB, South Africa, Paraguay, Russia & Eastern Caribbean

     This week - July 19 through July 24 - central banks from 11 countries or jurisdictions are scheduled to decide on monetary policy: China, Mozambique, Costa Rica, Indonesia, Uzbekistan Ukraine, euro area (European Central Bank), South Africa, Paraguay Russia and Eastern Caribbean.

     Following table includes the name of the country, the date of the next policy decision, the current policy rate, the local time a policy decision is announced, 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 be accessed by clicking on This Week.

WEEK 29
JUL 19- JUL 24, 2021
CHINA	20-Jul	3.85%	9:30	0	0	3.85%	EM
MOZAMBIQUE	21-Jul	13.25%	16:00	0	300	10.25%
COSTA RICA	21-Jul	0.75%		0	0	0.75%
INDONESIA	22-Jul	3.50%		0	-25	4.00%	EM
UZBEKISTAN	22-Jul	14.00%	14:30	0	0	15.00%
UKRAINE	22-Jul	7.50%	14:00	0	150	6.00%	FM
EURO AREA	22-Jul	0.00%	13:45	0	0	0.00%	DM
SOUTH AFRICA	22-Jul	3.50%		0	0	3.50%	EM
PARAGUAY	22-Jul	0.75%		0	0	0.75%
RUSSIA	23-Jul	5.50%	13:30	50	125	4.25%	EM
E. CARIBBEAN	23-Jul	2.00%		0	0	2.00%

 
    www.CentralBankNews.info

Chile becomes 7th EM central bank to raise key rate

     Chile's central bank raised its key interest rate for the first time in 2-1/2 years, as widely expected, saying a rapid narrowing of economic slack due to fiscal stimulus and strong consumption had created the appropriate conditions for a gradual withdrawal of monetary stimulus.

     The Central Bank of Chile (CBC) raised its monetary policy rate by 25 basis points to 0.75 percent in the first tightening of monetary policy since January 2019.

      Chile is the 7th emerging market central bank to raise its key rate this year to curb rising inflation due to the rapid economic recovery from last year's COVID-19 pandemic and the third central bank this week alone to tighten its policy stance after New Zealand ended its asset purchases and Canada trimmed its purchases for the second time.

      CBC's board, which was unanimous in its decision, said its monetary policy stance will still support the economic recovery after the rate hike as it has been one of the most expansive monetary policies among comparable economies and it expects the policy rate will remain below its neutral level over the next two years.

     Chile's central bank had kept its rate steady since March last year, when it was cut twice by a total of 1.25 percentage points, but began preparing financial markets for today's rate hike in June when it said it would be necessary to recalibrate its expansive monetary policy due to rising consumption and spending and omitted any reference to maintaining the policy rate.
      The bank's shift toward tightening was further underscored by the minutes of its board meeting on June 8 that showed a rate increase had been discussed as it was no longer necessary to maintain the current stimulus due to the strength of consumption and economic activity.

     CBC noted headline inflation in Chile's rose to 3.8 percent in June - above the bank's 3.0 percent target - but attributed this to higher fuel prices and excluding volatile prices core inflation was lower and inflation expectations were still around its target.

     As far as economic activity, CBC said the monthly economic activity index rose 18.1 percent year-on-year in May, above expectations and returning the economy to pre-pandemic levels.

     In early June the central bank raised its forecast for Chile's economy to expand between 8.5 to 9.5 percent this year, up from a March forecast of 6.0 to 7.0 percent growth.

Canada holds rate but trims asset purchases 2nd time

     Canada's central bank kept its key interest rate steady, as widely expected, but scaled back its asset purchases for the second time, saying this "reflects continued progress towards recovery and the Bank's increased confidence in the strength of the Canadian outlook."
     The Bank of Canada (BOC) left its target for the overnight rate at 0.25 percent, unchanged it was cut three times in March last year to what the bank considers the lower bound.

     In addition to the aggressive rate cuts - the rate was cut 1.50 percentage points - BOC also embarked on asset purchases, known as quantitative easing, of government bonds and commercial paper to keep longer-term interest rates low and keep financial markets operating smoothly.

     Initially BOC began buying C$5 billion of government securities a week and later expanded these purchases to include bonds from Canada's provinces and corporate bonds.

     But in October last year BOC shifted its weekly purchases toward longer-term bonds that had a more direct impact on borrowing costs and lowered the weekly amount to $4 billion.

     In April this year BOC became the first developed market central bank to begin the process of rolling back the extraordinary stimulus provided during the COVID-19 pandemic and cut the weekly purchase amount to $3 billion.

     Today, BOC trimmed its purchases further to $2 billion a week - the same day New Zealand's central bank decided to wrap up its asset purchases completely - and said further changes in the pace of bond purchases would depend on the strength and durability of the economic recovery.

     And while BOC raised its forecast for inflation this year and 2022, it lowered its forecast for growth this year as the third wave of the virus slowed growth in the second quarter.

     "The Governing Council judges that the Canadian economy still has considerable excess capacity, and that the recovery continues to require extraordinary monetary policy support," BOC said, confirming that it still expects to keep its policy interest rate at the current level until economic slack is absorbed so it sustainably reaches its 2.0 percent inflation target.

     As in April, when it last issued its economic forecast, it expects this to happen in the second half of 2022.

      In an update to its forecast, BOC sees gross domestic product growing 6.0 percent this year, down from the previous forecast of 6.5 percent, but then expanding by 4.6 percent in 2022, up from 3.7 percent previously forecast.

      Inflation in Canada has risen sharply in recent months and BOC now expects it to remain above 3.0 percent through the second half of this year before declining toward its 2.0 percent target in 2022 as short-run imbalances and economic slack pulls it lower.

     "The factors pushing up inflation are transitory, but their persistence and magnitude are uncertain and will be monitored closely," BOC said.

     Consumer price inflation rose to 3.6 percent in May from 3.4 percent in April and BOC expects the rate to average 3.0 percent this year, up from the previous forecast of 2.3 percent and 0.7 percent last year.

     In 2022 inflation is seen averaging 2.4 percent, up from 1.9 percent, and then 2.2 percent in 2023.

     The Canadian dollar, known as the loonie, has strengthened against the U.S. dollar since March last year through May this year but since the U.S. Federal Reserve's hawkish tilt in mid-June, it has lost ground, like most other currencies.

     Today, however, the loonie rose in response to BOC's tightening, with the loonie trading at 1.248 to the U.S. dollar to be up 2.2 percent since the start of this year.

New Zealand holds rate but ends asset purchases

     New Zealand's central bank left its key interest rate steady but will reduce its level of monetary stimulus by the end of next week by stopping further asset purchases to ensure it meets its inflation and employment targets.

     The Reserve Bank of New Zealand (RBNZ) kept its Official Cash Rate (OCR) as 0.25 percent, unchanged since March last year, but said it would "halt additional asset purchases under the Large Scale Asset Purchase (LSAP) program by 23 July 2021."
     "The Monetary Policy Committee agreed to reduce the current stimulatory level of monetary settings in order to meet its consumer price and employment objectives over the medium term," the central bank said, adding the major downside risks of deflation and high unemployment have receded.
     In addition to cutting key policy rate in March last year by 75 basis points to the current level, RBNZ also embarked on asset purchases later that month to keep interest rates low and boost the economy that was hit hard by the measures to contain the COVID-19 pandemic.
     At first RBNZ began buying up to NZ$30 billion of government bonds - known as quantitative easing - and then increased this amount in the following months until August last year when the target was raised to $100 billion. 
      In November the central bank then launched a Funding for Lending Program(FLP) to provide further stimulus and will maintain that program, arguing "some monetary stimulus remains necessary to best ensure CPI inflation will be sustained at the 2 percent per annum target midpoint, and that employment is at its maximum sustainable level."

      Today's decision to lower its level of monetary stimulus comes after RBNZ in May dropped its previous guidance of being ready to lower interest rates further due to growing confidence in the economic outlook. 

      In May the central bank also penciled in a 25-basis-point rate hike by September 2022.

      "Recent data indicate the New Zealand economy remains robust despite the ongoing impact from international border restrictions," the central bank said, adding aggregate economic activity is now above the pre-COVID-19 level, with economic confidence growing, and household spending and construction activity continuing to grow along with business investment.

      Looking to inflation, which rose to 1.5 percent in the first quarter of this year from 1.4 percent in the previous two quarters, RBNZ still expects near-term spikes in the second and third quarters but these are expected to be one-off in nature and temporary.

     "The Committee agreed that, in the absence of any further significant economic shocks, more persistent consumer price inflation pressure is expected to build over time due to rising domestic capacity pressures and growing labour shortages," the central bank said, adding there are uncertainties as to the pace and magnitude of any pass-through of costs to inflation in the medium term.

This week in monetary policy: New Zealand, Turkey, Canada, Chile, South Korea and Japan

     This week - July 12 through July 17 - central banks from 6 countries or jurisdictions are scheduled to decide on monetary policy: New Zealand, Turkey, Canada, Chile, South Korea and Japan.

     Following table includes the name of the country, the date of the next policy decision, the current policy rate, the local time a policy decision is announced, 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 be accessed by clicking on This Week.

WEEK 28
JUL 12- JUL 17, 2021
NEW ZEALAND	14-Jul	0.25%	14:00	0	0	0.25%	DM
TURKEY	14-Jul	19.00%	14:00	0	200	8.25%	EM
CANADA	14-Jul	0.25%	10:00	0	0	0.25%	DM
CHILE	14-Jul	0.50%	18:00	0	0	0.50%	EM
SOUTH KOREA	15-Jul	0.50%		0	0	0.50%	EM
JAPAN	16-Jul	-0.10%		0	0	-0.10%	DM

 
    www.CentralBankNews.info

China cuts RRR for all banks 50 bps, frees up 1T yuan

     China's central bank lowered its reserve requirement for most financial institutions by half a percentage point, freeing up about 1 trillion yuan in liquidity banks can use to lend and support economic activity.

     The People's Bank of China (PBOC) said the cut in the required reserve ratio (RRR) would lower the cost of capital for financial institutions by about 13 billion yuan, adding this will help bridge a liquidity gap during a peak period when medium-term loans mature and taxes are paid in mid-to-late July.

     "The orientation of prudent monetary policy has not changed," a spokesman said in a statement on PBOC's website, adding the RRR cut is a routine operation as monetary policy returns to normal after last year's response to the COVID-19 pandemic.

      PBOC operates three different reserve ratios depending on the type of financial institution and said today's cut was comprehensive and only excluded financial institutions that already had a 5.0 percent deposit reserve ratio, which is already the lowest.

     "The purpose of this RRR cut is to optimize the capital structure of financial institutions, improve financial service capabilities, and better support the real economy," the PBOC spokesman said.

      The last time PBOC cut the reserve ratio for large banks, which includes state-owned banks such as the Industrial & Commercial Bank of China, was in May 2020, when it was lowered to 11.0 percent.

      That move on May 26, 2020 was PBOC's second cut in RRR for large banks following an earlier cut in January that year as it began loosening its monetary policy stance in the early days of the pandemic.

      Since the first cut in RRR for large financial institutions on Jan. 2, 2020, the rate has been lowered by a total of 250 basis points and now stands at 10.50 percent.

     The weighted average RRR for all financial institutions is 8.9 percent.

      Following the cut in the reserve ratio for large banks in January, PBOC in February last year injected large amounts of liquidity into the banking system to prevent a financial crises and followed this up with a cut in its benchmark lending rate, the Loan Prime Rate, on Feb. 20 and then another cut on April 20.

      PBOC's move comes the day after China's State Council, the equivalent of the cabinet, said it wanted financial institutions to reduce fees, make profits and benefit enterprises and people. It also hinted PBOC could boost lending to businesses by lowering the amount of funds banks hold in reserve.

     China's economy has been slowing in recent months and inflation in June declined to 1.1 percent from an 8-month high of 1.3 percent in May as food costs fell.

     www.CentralBankNews.info

      

Australia holds rate but begins rolling back easy policy

     Australia's central bank left its key interest rate steady, as widely expected, but took two steps toward rolling back its extraordinary easy monetary policy as the economy and labour market continues to recover faster-than-expected from the COVID-19 pandemic.
     The Reserve Bank of Australia (RBA) left its benchmark cash rate target at 0.10 percent, unchanged since November 2020 when it was lowered for the third time that year to cushion economic activity from the impact of the COVID-19 pandemic.

     In addition to the rate cuts, RBA in March last year took a page out of the Bank of Japan's playbook and began targeting a yield of 0.10 percent on a 3-year benchmark government bond and in November embarked on quantitative easing by buying government bonds.

     RBA has been in a lengthy but continuous easing cycle since November 2011, cutting the rate 18 times and by 4.65 percentage since then.

     Helped by a combination of rising exports of commodities, fiscal and monetary stimulus, Australia's economy is now bouncing back from the pandemic, unemployment is falling and inflation rising.

     "The economic recovery in Australia is stronger than earlier expected and is forecast to continue," RBA said, raising its forecast for inflation in coming months.

     However, RBA also affirmed it was committed to maintaining "highly supportive monetary conditions" to ensure Australia returns to full employment and inflation meets its target.

     The bank's board once again said it would not raise its cash rate until actual inflation is sustainably within its 2.0 to 3.0 percent target range and it doesn't expect this to happen before 2024.

     But RBA also began rolling back some its crises measures, with the board deciding to keep the April 2024 bond as its target bond rather than extend the horizon to the November 2024 bond, which means the maturity of its yield target gradually declines.

     "The situation today is quite different from that in March last year; we are no longer looking over a cliff but instead transitioning from recovery to expansion," RBA Governor Philip Lowe said, adding the improved economy has widened the range of plausible scenarios for the cash rate.

     "This means that probabilities have shifted and the decision to adjust the approach to the yield target reflects this shift in probabilities," Lowe said, adding the yield target had proved to be a successful monetary policy measures and helped lower funding costs.

      The RBA's second A$100 billion tranche of bond purchases will be completed in early September  and while it plans to continue buying bonds after this date, the weekly purchases will be lowered to $4 billion from the current $5 billion. 

      In November the board will again review the rate of its purchases as it balances the benefit of responding in a timely way to the flow of economic news while providing financial markets with guidance about its future purchases.

     "We will continue buying bonds until there is further material progress towards the goals for full employment and inflation," Lowe said, with the RBA wanting to see clear evidence the stronger economy is translating into a pickup in aggregate wage growth and a lift in inflation towards the target.

      Australia's inflation rate rose to 1.1 percent in the first quarter from 0.9 percent in the fourth quarter and RBA raised its forecast for inflation to rise temporarily to about 3.5 percent to the June quarter from last month's forecast of over 3.0 percent.

     But underlying inflation is still seen averaging 1.5 percent this year and 2 percent by mid-2023.

Israel holds rate but ends business lending program

     Israel's central bank left its key interest rate unchanged, as expected, and while it reiterated it will "continue to conduct a very accommodative monetary policy for a prolonged time" it also began unwinding some of its extraordinary easy monetary policy by wrapping up a lending program.
     Bank of Israel (BOI) kept its interest rate unchanged at 0.10 percent, unchanged since April last year when it was cut for the first time in five years in response to the hit to economic activity from the COVID-19 pandemic.

     "The rapid recovery of economic activity continues," BOI said, adding there were not any material restrictions on economic activity at this point.

     However, since mid-June there had been an increase in a number of virus cases due to the Delta varian and this posed a risk to a continued recovery of the economy.

      The central bank's research staff lowered its forecast for economic growth this year to 5.5 percent from  the April forecast of 6.3 percent but raised the 2022 forecast by 1.0 percentage point to 6.0 percent.

      BOI said it had ended one of the programs that it had set up last year to help businesses cope with the impact of the pandemic. 

      Among BOI's programs put into effect last year - in addition to rate cuts - were a deferral of loan payments to banks for households and businesses, a reduction in banks' capital requirements and a loan program to banks against credit to small businesses along with bond purchases.

      As of Oct. 1, BOI will wrap up its program that provides long-term loans to the banking system against loans that are provided to small and micro businesses or upon the utilization of the program's 40 billion shekel.

     "With the removal of restrictions and the recovery of the economy, there is less need for the specific program to provide long-term loans to the banking system against loans to be issued to small and micro businesses, and the operation of this tool will be halted," BOI said.

      Inflation in Israel continued to rise to positive levels after registering negative rates much of last year, hitting 1.5 percent in May, up from 0.8 percent in April.

     BOI said inflation expectations for the coming year have continued to rise but remain within the target range of 1.0 to 3.0 percent.

This week in monetary policy: Israel, Australia, Uruguay, Romania, Albania, Sri Lanka, Malaysia, Serbia, Poland & Peru

     This week - July 5 through July 10 - central banks from 10 countries or jurisdictions are scheduled to decide on monetary policy: Israel, Australia, Uruguay, Romania, Albania, Sri Lanka, Malaysia, Serbia, Poland and Peru.

     Following table includes the name of the country, the date of the next policy decision, the current policy rate, the local time a policy decision is announced, 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 be accessed by clicking on This Week.

WEEK 27
JUL 5- JUL 10, 2021
ISRAEL	5-Jul	1.75%		0	0	2.50%	DM
AUSTRALIA	6-Jul	0.10%	14:30	0	0	0.25%	DM
URUGUAY	6-Jul	4.50%	15:00	0	0	N/A
ROMANIA	7-Jul	1.25%		0	-25	1.75%	FM
ALBANIA	7-Jul	0.50%		0	0	0.50%
SRI LANKA	8-Jul	4.50%	7:30	0	0	4.50%	FM
MALAYSIA	8-Jul	1.75%		0	0	1.75%	EM
SERBIA	8-Jul	1.00%	12:00	0	0	1.25%	FM
POLAND	8-Jul	0.10%		0	0	0.10%	EM
PERU	8-Jul	0.25%		0	0	0.25%	EM

 
    www.CentralBankNews.info