Tuesday, May 24, 2016

Paraguay cuts rate 25 bps as inflation starts to decelerate

    Paraguay's central bank cut its monetary policy rate by 25 basis points to 5.75 percent, saying the balance of risks in the domestic and external economy had changed, allowing it to adopt a more expansive monetary policy in a timely manner.
    The Central Bank of Paraguay raised its rate by 25 points in January after cutting it by 100 basis points in 2015. But since the rate hike, inflation has decelerated.
   In April inflation eased to 4.5 percent from 4.7 percent in March and a 2016-high of 5.2 percent in January.
    The rise in inflation in the first months of this year was largely due to volatile food prices and the International Monetary Fund said earlier this month the country's inflation rate was expected to decline to 4.5 percent during this year and remain at that level next year.
    The central bank targets inflation of 4.5 percent, plus/minus 2 percentage points.
    The central bank said the decline in inflation was expected and while overall economic activity was expanding moderately, certain sectors had slowed.
    Paraguay's economy grew by an estimated 3 percent last year, among the strongest in Latin America, but has been losing momentum. In the fourth quarter of last year, the economy grew by only 1.1 percent year-on-year, down from 2.3 percent in the third quarter.
    Despite risks to growth, including a further slowdown in Brazil and a fall in commodity prices, the IMF expects Paraguay's economy to remain resilient, with growth this year projected at 2.9 percent and 3.25 percent in 2017.
    The exchange rate of Paraguay's guarani started depreciating in September 2014 and lost 20 percent against the U.S. dollar in 2015 before hitting a low of 5,967 to the dollar in late January. 
    But since the central bank's rate hike on Jan. 20, the guarani has bounced back and was trading at 5,609 to the dollar today for an appreciation of 3 percent this year.


Nigeria holds rate, to adopt greater flexibility in FX market

    Nigeria's central bank left its benchmark Monetary Policy Rate (MPR) unchanged at 12.0 percent, saying his was the "least risky option" at a time of stagflation when policy options are very limited.
    The Central Bank of Nigeria (CNB), which switched into a tightening mode in March this year when it raised its rate by 100 basis points, added that this decision needed "time to crystalize" although the balance of risks remain tilted against economic growth.
     A scarcity of foreign exchange has been hampering Nigerian businesses for months and while the central bank said there was no easy fix because the lack of supply boils down to low foreign exchange earnings -  linked to the low oil price and low investments - it acknowledged that it was time to start reforming the foreign exchange market.
    The bank's monetary policy committee voted unanimously to "adopt greater flexibility in exchange rate policy to restore the automatic adjustment properties of the exchange rate" and gave the bank's management the mandate to work out the method for achieving this flexibility and decide when a new framework would begin.
    Speculation has been rife in financial markets in recent months that the CBN would either devalue the naira or seek to create some stability in the foreign exchange market to narrow the gab between the official exchange rate, the interbank market and the black market, where the dollar currently sells for over 300 naira compared the official peg of 197.
    "In the Committee's opinion, the key issue remains how to increase the supply of foreign exchange to the economy," the central bank said, adding that a dynamic foreign exchange framework could still not replace the imperative to the economy to increase its stock of foreign exchange through enhanced export earnings, which means the investment climate must be improved.
    Nigeria's naira tumbled in the second half of 2014 in response to the fall in global crude oil prices and only started to stabilize in March 2015 following the imposition of foreign currency controls to preserve foreign reserves.
    Since March the central bank has adjusted its exchange rate peg several times and in the interbank market the naira was trading at a daily average of 197 between March 25 and May 13, the CBN said.
    "The Committee, therefore, remains committed to its mandate of maintaining a stable naira exchange rate," the bank said.
    Given its dependence on imports, the shortage of foreign exchange has helped fuel inflation, the central bank acknowledged, adding that headline inflation jumped to 13.72 percent in April from 12.77 percent in March while core inflation rose for the third month in a row to 13.35 percent.
    In addition to the shortage of foreign exchange, the CBN attributed rising inflationary pressures to an energy crises that led to a shortage of petroleum products, exchange rate pass-through from imported goods, a high cost of electricity, high transport costs, a drop in food output, high cost of inputs and low industrial output.
    Nigeria's economy contracted by 13.7 percent in the first quarter of this year from the fourth quarter of last year due energy shortages, scarce foreign exchange and depressed consumer demand, which means that businesses would not investment or even procure raw materials.
    On an annual basis, the economy shrank by 0.36 percent, down from growth of 2.11 percent in the previous quarter, for the first negative growth rate in many years, and 4.32 percentage point below the growth rate seen in the first quarter of 2015.
    Earlier this month Nigeria's government raised gasoline prices by 67 percent in an effort to reduce fuel subsidies and fuel shortage, and attract more suppliers and investment. Although Nigeria is Africa's largest crude oil producer, and the fifth highest exporter worldwide, it relies on imports to meet some 70 percent of its domestic needs.

Hungary cuts 15 bps but signals end to easing cycle

    Hungary's central bank cut its base rate by another 15 basis points to 0.90 percent but said it would maintain this rate "for an extended period" as it had now reached a level that "ensures the medium-term achievement of the inflation target and a corresponding degree of support to the economy."
    The National Bank of Hungary (MNB) has now cut its policy rate by 45 basis points this year following similar-size cuts in March and April.
    The rate cut was largely expected by economists and follows the central bank's statement in April about a "further slight reduction."
    Since July 2012, when it embarked on an easing cycle, the MNB has cut its key rate by 610 basis points, only interrupted by a pause between July 2014 and March 2015.
    The central bank said inflationary pressures in Hungary will remain moderate for an extended period as there is still a degree of unused capacity and inflation is first expected to approach the bank's 3.0 percent inflation target in the first half of 2018, as forecast in its March inflation report.
    However, the MNB added that recent wage data suggest that the risk of "excessively low level of inflation expectations has diminished" and the government's draft budget is expected to help close the output gap.
     The government, headed by Prime Minister Viktor Orban, is preparing to cut the Value-Added-Tax rate for some food, internet and restaurant services in 2017.
    Although Hungary's economy shrank by more than expected in the first quarter of this year, the central bank said this was largely due to one-off effects, such as a slower drawdown of funding from the European Union and temporary factory shutdowns.
    In contrast, retail sales continued to rise in March, the unemployment rate has fallen and economic growth is expected to "pick up notably in the second half of the year."
    In the first quarter of this year Hungary's Gross Domestic Product shrank by 0.8 percent from the fourth quarter of 2015 and on an annual basis it grew by only 0.9 percent compared with 3.2 percent in the fourth quarter of last year.
    Hungary's headline inflation rate rose to 0.2 percent in April from minus 0.2 percent in March and is forecasts to remain below the central bank's target in the next two years before approaching it in the first half of 2018.

Turkey cuts lending rate 50 bps but maintains repo rate

    Turkey's central bank cut the upper band of its interest rate corridor for the third consecutive month in "a measured step toward simplification" of its rate structure but again left its benchmark repo rate steady at 7.50 percent as the "improvement in the underlying core inflation trend remains limited, necessitating the maintenance of a tight liquidity stance.
    The Central Bank of the Republic of Turkey (CBRT) cut the overnight marginal funding rate by another 50 basis points to 9.50 percent and the lending rate at its late liquidity window by 50 basis points to 11.0 percent.
    Since March the overnight funding rate has been cut by 125 basis points in response to what the CBRT described as a "marked decline" in inflation due to lower unprocessed food prices. The benchmark repo rate has been steady at 7.50 percent since February 2015.
    The central bank reiterated its recent guidance that "future monetary policy decisions will be conditional on the inflation outlook" and in light of inflation expectations, prices and other factors, a tight monetary policy stance will be maintained.
    Turkey's headline inflation rate eased to 6.57 percent in April from 7.46 percent in March while core inflation eased to 9.3 percent, down from 9.5 percent as both numbers remain well above the bank's target of 5.0 percent.
    In its latest inflation report, the CBRT maintained its outlook for inflation to reach 7.5 percent by the end of this year and 6 percent by the end of 2017, reaching 5 percent in 2018.
    In contrast to its statement in April, when the central bank said global volatility had declined, the central bank today said "global volatility has increased to some extent," and the tight monetary policy stance, cautious macroeconomic policies helped increase the economy's resilience to shocks.

Monday, May 23, 2016

Israel holds rate, sees higher risks to growth, exports fall

    Israel's central bank left its key policy rate steady at 0.10 percent, as expected, and said its policy stance will remain "accommodative for a considerable time," a guidance that has been reinforced by "the intensifying decline in exports in recent months," along with developments in global economic growth and inflation, domestic economic activity, the exchange rate and the monetary policy of major central banks.
    But the Bank of Israel (BOI) has clearly become more concerned over economic growth, noting the "worrying contraction in exports" and an increased risk to growth. Last month the BOI merely said the risks to growth "remain high."
    In April Israel's exports declined by an annual 11 percent to US$3.596 billion, the lowest since August 2009, while exports excluding diamonds and startup contracted by 12.9 percent. In addition, services exports have not grown in 1-1/2 years, the BOI said.
    Israel's Gross Domestic Product grew by an annual 1.7 percent in the first quarter of this year, down from 2.1 percent in the fourth quarter of last year, with private consumption continuing to lead growth with an increase of 4 percent.
    Israel remains mired in deflation, with consumer prices down by an annual 0.9 percent in April compared with March's fall of 0.7 percent and the BOI repeated its view from last month that risks to achieving its inflation target "remain high."
    The BOI repeated its recent phrase that it will "examine the need to use various tools to achieve its objectives of price stability," employment, growth and a stable financial system.
    Interest rate markets have remained unchanged, the BOI said, adding they don't show any change in BOI rates in the next year and private forecasters project that the policy rate will remain at its current level in coming months.
    In March the BOI, which has maintained its key rate since cutting it by 15 basis points in February last year,  said it expected inflation to turn around in the next few months and said it saw no need to follow other central banks and pursue various forms of extraordinary policy measures.
    The BOI's March forecast saw inflation averaging 0.2 percent by the fourth quarter of this year, then 0.8 percent by the first quarter of 2017 and 1.4 percent by end-2017, finally moving into the central bank's inflation target of 1-3 percent by the middle of 2017.
    Economic growth was forecast to expand 2.8 percent this year, up from 2015's 2.5 percent, and then by 3.0 percent in 2017.
    After depreciating sharply between August 2014 and March 2015, Israel's shekel has firmed but since the last BOI policy meeting on April 20, the shekel has weekend by 3 percent against the U.S. dollar. Over the preceding 12 moths, the shekel is up by 3.3 percent in terms of the nominal effective exchange rate.
   The shekel was quoted at 3.87 to the dollar today, largely unchanged since the start of the year.

Kenya cuts rate 100 bps as inflation seen in target range

    Kenya's central bank cut its Central Bank Rate (CBR) by 100 basis points to 10.50 percent, saying inflation is expected to decline and remain within the target range in the short term, which means "there was policy space for an easing of monetary policy while continuing to anchor inflation expectations."
    The Central Bank of Kenya (CBK), which raised its policy rate by 300 basis points in 2015 in response to a fall in the shilling's exchange rate and a rise in inflation, added that inflation data showed there were "no significant demand pressures in the economy" and the foreign exchange market had remained stable, supported by a narrower current account deficit.
    Earlier this month Patrick Njoroge was quoted as saying the central bank had room to start easing its policy as inflation was falling back within the target range of 2.5 percent to 7.5 percent.
   Kenya's consumer price inflation rate eased to 5.27 percent in April from 6.45 percent in March, with the 3-month annualized non-food-nonfuel inflation rate down to 4.6 percent in April from 6.8 percent in March.
    Since November last year, the shilling's exchange rate has remained relatively stable, with the central bank attributing this to a narrowing of the current account deficit on improved earnings from tea and horticulture exports, strong diaspora remittances and a lower bill for oil imports.
   The shilling was quoted at 100.9 to the U.S. dollar today, up 1.4 percent since the start of the year.
    Kenya's current account deficit was estimated at 6.8 percent of Gross Domestic Product in 2015, down 3 percentage points from 2014, and is expected to narrow further this year, the CBK said.
    Foreign exchange reserves at the central bank amounted to US$7.688 billion, up from $7.377 billion at the end of March.
    In March the International Monetary Fund approved a $1.5 billion precautionary arrangement and the CBK said this arrangement, together with its reserves, "will continue to provide adequate buffers against short-term shocks."

Sunday, May 22, 2016

Pakistan cuts rate 25 bps, low inflation in '16, higher '17

    Pakistan's central bank cut its policy rate by 25 basis points to 5.75 percent, saying inflation is expected to remain low in the current fiscal 2016 year and below the target of 6 percent despite a rising trend in the last seven months.
    The State Bank of Pakistan (SBP), which last year cut its rate by 300 basis points, added in a statement from May 21 that inflation in fiscal 2017, which begins July 1, would reach a "higher plateau" as demand was picking up, higher global oil prices will be passed on to consumer prices and higher taxes, electricity and gas tariffs, if realized, would put upward pressure on inflation.
    Pakistan's inflation rate rose to 4.17 percent in April from 3.94 percent in March and 1.61 percent in January with core inflation also following a rising trend, "indicating a buildup of underlying inflationary tendencies."
    Core inflation eased to 4.4 percent in April from 4.7 percent in March but was up from a recent low of 3.4 percent in October last year.
    In April the SBP forecast average inflation in FY16 of 3-4 percent.
    Economic growth in Pakistan in the current fiscal year is set to exceed the FY15 growth of 4.2 percent but below the target of 5.5 percent, the SBP said, adding the current account deficit was likely to shrink to the previous year's level of around 1 percent of Gross Domestic Product and foreign exchange reserves were projected to continue to rise.

This week in monetary policy: Israel, Kenya, Turkey, Hungary, Nigeria, Paraguay, Canada, Ukraine, Moldova, Fiji, Colombia and Trinidad & Tobago

    This week (May 23 through May 28) central banks from 12 countries or jurisdictions are scheduled to decide on monetary policy: Israel, Kenya, Turkey, Hungary, Nigeria, Paraguay, Canada, Ukraine, Moldova, Fiji, Colombia, and Trinidad and Tobago.
    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.

MAY 23 - MAY 28, 2016:
COUNTRY       DATE           RATE      LATEST        YTD     1 YR AGO    MSCI
ISRAEL 23-May 0.10% 0 0 0.10%       DM
KENYA 23-May 11.50% 0 0 8.50%       FM
TURKEY 24-May 7.50% -25 0 7.50%       EM
HUNGARY 24-May 1.05% -15 -30 1.65%       EM
NIGERIA 24-May 12.00% 100 100 13.00%       FM
PARAGUAY 24-May 6.00% 0 25 6.25%
CANADA 25-May 0.50% 0 0 0.75%       DM
UKRAINE 26-May 19.00% -300 -300 30.00%       FM
MOLDOVA 26-May 15.00% -200 -450 14.50%
FIJI 26-May 0.50% 0 0 0.50%
COLOMBIA 27-May 7.00% 50 125 4.50%       EM
TRINIDAD & TOBAGO 27-May 4.75% 0 100 3.75%

Friday, May 20, 2016

Sri Lanka holds rate, inflation seen in mid-single digits

    Sri Lanka's central bank left its key policy rates unchanged, saying the recent rise in taxes and supply-side disruptions from adverse weather could exert some upward pressure on inflation in the immediate future but inflation is still expected to remain in mid-single digit levels as they are supported by appropriate policies.
    The Central Bank of Sri Lanka last raised its key rates, the Standing Deposit Facility Rate (SDRF) and the Standing Lending Facility Rate (SLFR), by 50 basis points in February to 6.50 percent and 8.0 percent, respectively.
    Sri Lanka's headline inflation rate rose to 3.1 percent in April from 2.0 percent in March while core inflation was unchanged at 4.5 percent.
    This month Sri Lanka's government raised the Value Added Tax (VAT) rate to 15 percent from 11 percent and removed certain exemptions to raise revenue amidst a rising budget deficit.
    Last month the International Monetary Fund (IMF) agreed to provide $1.5 billion to Sri Lanka that is expected to result in other loans for total inflow of $2.2 billion. As part of the IMF conditions, the government is expected to reform its budget and improve the performance of state-run enterprises.
    The aim is to narrow the fiscal deficit to 3.5 percent of Gross Domestic Product by 2020 from 7.4 percent in 2015, up from 5.7 percent in 2014 and above the government's target of 4.4 percent.
    The central bank said foreigners had showed renewed interest in government securities in the last month and together with the IMF's Extended Fund Facility, along with structural reforms, this should enhance Sri Lanka's resilience to external shocks and improve investor confidence.
    Sri Lanka's rupee has been depreciating steadily in recent years and was trading at 146.7 to the U.S. dollar today, down 1.8 percent this year and down 10.6 percent since the start of 2015.

Thursday, May 19, 2016

South Africa holds rate, won't hesitate to tighten again

    South Africa's central bank left its benchmark repurchase rate at 7.0 percent as it "felt that there was some room to pause in this tightening cycle" due to an improved outlook for inflation, but added that if "will not hesitate to act appropriately should the inflation dynamics require a response."
    The South African Reserve Bank (SARB) has raised its rate by 200 basis points since January 2014, including 75 points this year and said five members of its monetary policy committee voted to maintain the policy rate today while one member preferred to raise it by another 25 points.
    Past rate hikes, including a 25-basis-point rate hike in March, helped improve the outlook for inflation but the central bank's monetary policy committee again underlined its sensitivity to economic growth which continues to disappoint.
    "While there are signs that the economy may be reaching the low point in the growth cycle, the recovery is expected to be slow with downside risks," SARB Governor Lesetja Kganyago said.
    South Africa's Gross Domestic Product expanded by only 0.6 percent in the fourth quarter of 2015 from the same 2014 period and SARB said recent data painted "a particularly bleak picture" of the first quarter of this year as mining output contracted, growth in the manufacturing sector was "minimal" and electricity output and consumption declined.
    SARB revised downwards its 2016 growth forecast to 0.6 percent from 0.8 percent. While growth is expected to improve over the next two years, it still revised downward its forecast for 2017 and 2018 by 0.1 percentage point to 1.3 percent and 1.7 percent, respectively.
    South Africa's consumer price inflation rate eased to 6.2 percent in April from 6.3 percent in March and 7.0 percent in February, but the bank's measure of core inflation - which excludes food, fuel and electricity, rose to 5.5 percent in April from 5.4 percent in March.
    "While the impact of the weaker exchange rate remains relatively low, there are indications of increased pass-through in some categories, particularly new motor vehicles and appliances," Kganyago said.
    The bank's latest inflation forecast shows a slight deterioration in the near term, but some improvement in the medium term, the bank said, adding that inflation is now expected to average 6.7 percent this year, slightly below the 6.7 percent forecast previously.
    Inflation is seen peaking at 7.3 percent in the fourth quarter of this year and then average 6.2 percent in 20-17 and 5.4 percent in 2018, marginally below previous forecasts due to assumptions of higher interest rates, a slightly higher exchange rate, a wider output gap and lower electricity prices.
    SARB, which targets inflation of 3.0 to 6.0 percent, added that the forecast for inflation for this year was lowered to 5.9 percent from 6.2 percent but the forecasts for 2017 and 2018 were unchanged at 5.7 percent and 5.2 percent, respectively.
    After steadily depreciating since mid-2011 and hitting historic lows in January, South Africa's rand bounced back in the first four months of this year on higher commodity prices, a narrower trade balance and expectations of a slower pace of U.S. rate hikes.
    However, since the start of May, when global growth concerns again surfaced, it has resumed its fall and was trading at 15.86 to the U.S. dollar today, down 2.1 percent this year.

Indonesia holds rate but says it may use room for easing

    Indonesia's central bank left its current and future benchmark rates steady, as expected, but signaled that it may return to the easing path by saying "room for monetary easing that has been opened may be used an an earlier time" provided the macroeconomy remains stable.
    Bank Indonesia (BI), which cut its rate by a total of 75 basis points in the first three months of the year, acknowledged that economic growth in the first quarter of this year was below its expectation and lowered its 2016 growth forecast to 5.0-5.4 percent from a previous forecast of 5.2-5.6 percent.
   The BI added that the transmission of its monetary policy was improving so preparations to reformulate its policy rate was continuing.
   In April the central bank said it would change its benchmark policy rate from the current 12-month BI rate, currently at 6.75 percent, to the BI 7-day (Reverse) Repo rate, currently at 5.50 percent.
    The new rate structure, which will take effect Aug. 19, also includes a symmetrical and narrower interest rate corridor where the floor (DF rate) and the ceiling (LF rate) will be 75 basis points below and above the 7-day reverse repo rate.
    The BI's guidance of possibly using room for monetary easing is new compared with its previous statement, a likely reaction to annual growth in the first quarter of this year that was 4.92 percent, below its forecast of 5.1 percent and down from 5.04 percent in the fourth quarter of last year.
    Although BI lowered its growth forecast for this year, it expects growth to rebound from the first quarter due to fiscal stimulus linked to accelerated infrastructure spending, a package of measures to boost competitiveness and improve the investment climate, and from its easier monetary policy.
     BI also said macroeconomic stability was "well maintained," referring to the inflation rate that remains within its target range of 4.0 percent, plus/minus 1 percentage point, an improving current account deficit and a relatively stable exchange rate.
    Indonesia's inflation rate eased to 3.6 percent in April from 4.45 percent in March and the central bank forecast inflation around the midpoint of its target range by the end of this year.