Thursday, March 22, 2018

China raises 7-day repo rate 5 bps, HK raises base rate

      China raised its 7-day reverse repurchase rate, used for money market operations, by 5 basis points to 2.55 percent, saying this was in line with market expectations and "a normal reaction" to the U.S. Federal Reserve's increase of its key interest rate on March 21.
       But the People's Bank of China (PBOC) again left its benchmark one-year lending rate at 4.35 percent. This rate was last cut in October 2015.
       Hong Kong's central bank, the Hong Kong Monetary Authority (HKMA), also raised its base rate by 25 basis points to 2.0 percent in response to the Fed's 25 point increase in its fed funds rate to 1.50 - 1.75 percent.
        Hong Kong's monetary policy tracks that of the U.S., with the Hong Kong dollar trading in a band of 7.75 - 7.85 to the U.S. dollar. In recent months the Hong Kong dollar has come under pressure as the spread between Hibor, the local lending rate,  and Libor has widened due to an abundance of liquidity in the banking system.
       The PBOC's rate increase comes days after the National People's Congress (NPC) named Yi Gang as successor to Governor Zhou Xiaochuan, who has been at the helm of the PBOC since 2002. 
      Yi, deputy governor of PBOC, joined the PBOC in 1997 after first earning a business degree at Hamline University in Minnesota, then a Ph.D in economics at the University of Illinois before joining the University of Indianapolis as professor in 1986.
       In 2017 the PBOC raised various short- and medium-term rates four times, with two of the increases following Fed rate hikes in March and December. However, it did not change rates following the Fed's rate hike in June.
       The rate on the the PBOC's 7-day reverse repo rate was last raised on Dec. 14, 2017 -  in line with the Fed's rate hike on Dec. 13 - by 5 basis points to 2.50 percent. A few days later the 14-reverse repo rate was raised to 2.65 percent from 2.60 percent.
       In a statement on its website, PBOC said the interest spread between China and the U.S. will help guide the relationship of open market rates to currency rates, and help market players form interest rate expectations and "restrict irrational financial behavior," stabilizing leverage ratios.
       Since the beginning of this year, the PBOC said it had stepped up the fine-tuning and anticipatory open market operations to maintain stable, moderately flexible liquidity in the banking system, and to guide the rational growth of money and credit.
       The combination with a slight upward movement of open market interest rates is conducive to supply, the PBOC added.
       Analysts expect the PBOC to raise its reverse repurchase rates several times this year as it attempts to deleverage the economy but then also lower the reserve requirement rate from 17 percent to support smaller businesses.
       China has been tightening up its regulatory structure in recent years to better control shadow financing and reduce the risks in the financial system while still maintaining economic growth.
       The gradual increase in interest rates is also aimed at squeezing asset bubbles and curbing the growth of debt
       Last week the NPC changed some of China's financial regulatory structure, merging its banking and industry regulatory commissions into one group and giving the PBOC the power to draft key regulations and prudential oversight. 


Wednesday, March 21, 2018

Brazil cuts rate 25 bps, easing in May seen appropriate

       Brazil's central bank lowered its benchmark Selic interest rate by another 25 basis points to 6.50 percent and said additional easing at the next meeting of its monetary policy committee would be "appropriate" as this would mitigate the risk that inflation would not meet its target.
       However, the Central Bank of Brazil added this expectation for the May 16 meeting of its policy committee, known as Copom, could change if further easing is unnecessary.
       Beyond the May meeting, Copom said it "deems it appropriate to interrupt the monetary easing process," while it evaluates the next steps, barring changes to its forecast and the balance of risks.
       Today's rate cut was expected by analysts after inflation in February eased further to 2.84 percent from January's 2.86 percent, below its target of 4.5 percent, plus/minus 1.5 percentage points.
       Prior to the release of the latest data, Copom in February said it would pause in its easing campaign though it didn't completely shut the door on further cuts by saying it could change its view if the balance of risks changed along with inflation and inflation forecasts.
      "The Committee judges that its baseline inflation scenario has evolved in a more benign fashion than expected since the turn of the year," Copom said, adding its projections for inflation this year based on the Focus survey now stand at 3.8 percent for this year and 4.1 percent for 2019.
      This compares with its forecast from February for 2018 and 2019 inflation of 4.2 percent.
      Reflecting today's rate cut, the central bank assumed that the policy rate would end this year at 6.50 percent and then rise to 8.0 percent by the end of 2019.
      Brazil's central bank has now cut its rate 7.75 percentage points since embarking on an easing cycle in October 2016.

UAE raises deposit rate, repo rate 25 bps

     The central bank of the United Arab Emirates raised its rates on benchmark certificates of deposits and the repo rate on short-term borrowing by 25 basis points each, in line with the U.S. Federal Reserve's 25 point hike in its fed funds rate earlier in the day.
     The Central Bank of the U.A.E, (CBUAE) whose currency is fixed to the U.S. dollar as other members of the Gulf Cooperation Council (GCC), has shadowed Fed hikes since tightening began in December 2015.
      The CBUAE's deposit rate was raised to 2.50 percent and is now 150 basis point higher than before policy tightening began in December 2015.
      The repo rate on short-term borrowing against CDs was raised to 2.0 percent.



Kuwait raises rate 25 bps in first hike since March 2017

      Kuwait's central bank raised its benchmark discount rate by 25 basis points to 3.0 percent, its first rate hike since March 2017, following the U.S. Federal Reserve's rate hike earlier in the day.
     The Central Bank of Kuwait (CBK), whose currency is pegged to the U.S. dollar, said the rate increase was part of the long-established fundamentals of its monetary policy to maintain the competitiveness and attractiveness of the national currency as a profitable and reliable source of domestic savings, which in turn helps banks finance the national economy.
      While the CBK raised its rate in synch with the Fed's rate hike in March 2017, it left the discount rate steady after the two Fed hikes in June and December 2017.


Fed raises rate 25 bps, sees 3 hikes in 2018 and 2019

     The Federal Reserve, the U.S. central bank, raised its benchmark federal funds rate by another 25 basis points to 1.5 - 1.75 percent, as widely expected, and retained its forecast for raising the rate by a total of three times this year and also expects to raise the rate three times in 2019.
      The Federal Reserve has now raised its rate six times since December 2015 and by a total of 150 basis points as the rate increases to a level not seen since October 2008 when the Fed was slashing its rate in response to the deepening global financial crises. 
      "The economic outlook has strengthened in recent months," the Fed's policy-making arm said, adding near-term risks to its outlook still remained balanced but it is monitoring inflation carefully.
      Today's decision by the FOMC, which for the first time was chaired by Jerome Powell who took over from Janet Yellen in February, was unanimous.
       In an update to its economic forecast, the median projection of the fed funds rate this year was unchanged from the December forecast at 2.1 percent, up from 1.4 percent in 2017, implying three rate hikes of 25 basis points each.
       But for 2019, when tax cuts and higher federal spending will continue to propel economic growth, the FOMC now projects a fed funds rate of 2.9 percent, up from 2.7 percent seen in December, implying another three rate hikes.
       In 2020 the fed funds rate is seen averaging 3.4 percent, up from 3.1 percent, implying two rate hikes.  The longer-run fed funds rate was raised to 2.9 percent from 2.8 percent.

       Since the Fed's December projections, the U.S. Congress has not only passed personal and corporate tax cut worth $1.5 trillion over 10 years, but also lifted Federal spending by $300 billion over two years.
       Earlier this month Fed Governor Lael Brainard said many of the forces that had acted as headwinds to U.S. growth were now generating tailwinds and the change in fiscal policy from restraint to substantial stimulus was at a time when the economy is already close to full employment.
       She said the tax cuts were estimated to boost GDP growth by as much as 0.5 percentage points this year and 2019 while the budget deal to raise spending by around 0.4 percent of GDP in each of the next two years.
      The FOMC raised its forecast for economic growth this year to 2.7 percent from a previous 2.5 percent and the 2019 forecast to 2.4 percent from 2.1 percent. The 2020 forecast was unchanged at 2.0 percent.
      And while unemployment is seen falling faster than earlier projected, the forecast for inflation was largely unchanged, averaging 1.9 percent this year, 2.0 percent in 2019 and 2.1 percent in 2020.
      In the fourth quarter of 2017 US Gross Domestic Product grew by an annual rate of 2.5 percent, up from 2.3 percent in the third quarter while the unemployment rate was unchanged for the fifth month in a row of 4.1 percent in February.
      Inflation, as measured by the Fed’s preferred gauge of the personal consumption expenditure has been steady in the last three months at 1.7 percent.
      The FOMC sees the jobless rate dropping to 3.8 percent this year, down from 3.9 percent seen in December, and then to 3.6 percent in 2019 and 2020, respectively.

Tuesday, March 20, 2018

Chile holds rate, sees lower inflation from strong peso

      Chile's central bank left its monetary policy rate at 2.50 percent but said inflation will be lower than expected due to a strengthening of the peso and it would be monitoring this situation "with special care," as this may jeopardize the convergence of inflation to its target.
      On the other hand, the Central Bank of Chile added the latest data showed that the risks that inflation would not converge toward its 3.0 percent target had moderated, mainly due to the impact of an improved economic outlook on a closing of the output gaps.
      At its last meeting in February, Chile's central bank, which has maintained its rate since May last year, voiced concern over the low level of inflation and said this may warrant additional monetary stimulus.
       In today's statement, the bank's board omitted this guidance. Today's policy decision was again unanimous.
       Since February the outlook for Chile's exports has continued to improve and the economy performed better in the second half of 2017 than expected, especially the non-mining sector.
      The central bank pointed to a recovery of investment in construction and other works.
      Chile's economy expanded by an annual 3.3 percent in the fourth quarter of last year, up from 2.5 percent in the third quarter, 0.5 percent in the second quarter and a contraction of 0.4 percent in the first quarter.
       In December the central bank forecast 2018 growth of 2.5-3.5 percent while inflation was seen rising to 2.9 percent in 2018 from 2.1 percent this year.
       Inflation has also behaved as the central bank expected, with the appreciation of the peso dominating the "inflationary dynamic."
       And while short-term inflation expectations had shifted downward, two years ahead they show no major change, the bank added.
       Chile's headline inflation rate eased to 2.0 percent in February from 2.2 percent in January, with the core measure close to 1.5 percent.
       The peso has appreciated since early December last year though it gave back so of its gains in the last month. Today the peso was trading at 609.9 to the U.S. dollar, up 0.9 percent this year and up 7.6 percent since Dec. 9, 2017.

Morocco maintains rate and raises growth forecast

      Morocco's central bank left its monetary policy rate at 2.25 percent, citing a positive reaction of financial markets and institutions to the introduction of a more flexible exchange rate system in January along with an improving economy and moderate inflation.
      The Bank of Morocco, or Bank Al-Maghrib (BAM), which has kept its rate steady since March 2016, raised its forecast for 2018 economic growth to 3.3 percent from December's forecast of 3.0 percent following growth in 2017 of 4.0 percent due to a 14.8 percent rebound in agriculture while non-agricultural output only rose by 2.7 percent.
      This year BAM expects a 2.3 percent rise in agriculture value added while non-agriculture output is expected to continue to rebound and rise by 3.2 percent.
       In 2019 overall growth is expected to accelerate to 3.5 percent, slightly down from December's forecast of 3.6 percent.
      Last year Morocco saw a strong improvement in exports, which rose 9.4 percent, while tourism receipts rebounded 8.5 percent and remittances from Moroccans abroad up 4.5 percent.
      At the same time imports rose 6.4 percent, driven by a 27.4 percent jump in the cost of energy imports, with the current account deficit narrowing to 3.8 percent of Gross Domestic Product from 4.4 percent.
       BAM expects exports to continue to rise and travel receipts are forecast to increase by 5.7 percent this year and 5.2 percent in 2019 while remittances should grow 5.0 percent and 4.1 percent, respectively.
       Imports are also expected to accelerate to growth of 7.1 percent this year before slowing to 4.2 percent in 2019, and the current account deficit should be around 4 percent in 2018 and 2019.
       Assuming foreign direct investment of around 4.4 percent of GDP in 2018 and 3.5 percent in 2019, foreign exchange reserves would amount to around 257.3 billion dirhams in 2018 and 244.4 billion in 2019, enough for 5 months and 26 days of imports and 5 months and 17 days, respectively.
       Morocco's inflation rate eased to 1.8 percent in January from 1.9 percent in December after 2017 inflation averaged only 0.7 percent due to a fall in food prices.
       "In the medium term inflation will increase while remaining at moderate levels," BAM said, forecasting 2018 inflation of 1.8 percent and 1.5 percent in 2019. Underlying inflation is forecast at 1.4 percent this year and 1.9 percent in 2019 due to a consolidation of domestic demand and a rise in imported inflation.
      On Jan. 15 Morocco introduced a more flexible exchange rate system by widening the dirham's fluctuation band to 2.5 percent on either side from 0.3 percent for a total range of 5.0 percent.
      The dirham is mainly pegged to the euro but last year BAM reduced the euro weight to 60 percent from 80 percent and raised the U.S. dollar weighing to 40 percent from 20 percent.
      Today the dirham was trading at 11.29 to the euro, down 0.7 percent this year.


Tajikistan cuts rate 75 bps, sees no need for tight policy

      Tajikistan's central bank lowered its benchmark refinancing rate by another 75 basis points to 14.0 percent, saying it no longer needs to continue with a tight monetary policy due to the lower risk of inflation and a gradual stabilization of the external economy.
       The National Bank of Tajikistan has now cut its rate by 200 basis points this year following a 125-point rate cut in January.
        In 2016 and 2017 Tajikistan's central bank raised its rate by a total of 800 basis points - the last hike was in March 2017 - to curb inflation from a sharp depreciation of its somoni.
        Like other former Soviet republics, Tajikistan was hit hard by Russia's economic crises as remittances and exports plunged, weakening the somoni and triggering stress in the banking system and the insolvency of two large banks as non-performing loans soared and banks had open foreign exchange positions and foreign exchange lending to borrowers.
        But inflation has been declining steadily since hitting 9 percent in June 2017 and the central bank forecast inflation will continue to decline in the first half of 2018 and then remain within its target range of 7.0 percent, plus/minus 2 percentage points.
        Inflation in Tajikistan - located west of China, north of Afghanistan and east of Uzbekistan - fell to 5.2 percent in February from 6.5 percent in January and 6.7 percent in December on lower prices of basic consumer goods, such as flour, rice, vegetable oil and vegetables.
        Due to a more balanced monetary policy and limited pressure on inflation from the exchange rate, the central bank said core inflation was 1.9 percent.
        The potential risks to inflation are mainly related to seasonal supply shocks, a possible fluctuation in the exchange rate along with external factors, such as the monetary policy of the U.S. Federal Reserve and the geopolitical situation, the central said.
        The exchange rate of Tajikistan's somoni has been stable since May last year and was quoted at 8.82 to the U.S. dollar, unchanged this year but down 10.6 percent since the start of 2017.
        Tajikistan's Gross Domestic Product grew by an annual 7.1 percent in the fourth quarter of last year, up from 6.8 percent in the third quarter.

Monday, March 19, 2018

Kenya cuts rate 50 bps, inflation expectations anchored

      Kenya's central bank surprised financial markets by cutting its Central Bank Rate (CBR) by 50 basis points to 9.50 percent, saying there was scope to ease its monetary policy stance to boost economic activity as inflation expectations are well anchored and economic output is below its potential level.
      It is the first rate cut by the Central Bank of Kenya (CBK) since September 2016 and the bank's monetary policy committee said it would closely monitor the impact of this cut along with changes to the global and domestic economy and "stands ready to take additional measures as necessary."
       CBK said the meeting by its policy committee was held "against a backdrop of sustained macroeconomic stability, improved weather conditions, increased optimism on the economic growth prospects, improvement in the business environment, and the continued strengthening of the global economy."
      Kenya's inflation rate has been decelerating steadily in the last 12 months and fell to 4.46 percent in February from 4.83 percent in January and a 2017-high of 11.7 percent last May.
      A fall in food prices outweighed a rise in fuel prices from higher global oil prices and CBK said it expects inflation to remain within the government's target of 5.0 percent, plus/minus 2.5 percentage points, in the near term.
      The committee's private sector market perception survey from this month showed inflation was expected to decline in the near term and growth expectations for 2018 were higher.
      The exchange rate of Kenya's shilling has been firming this year on improved investor sentiment, supported by a narrower current account deficit, with the central bank expecting the deficit to narrow further to 5.4 percent of Gross Domestic Product this year from 6.4 percent in 2017.
       The shilling was trading at 101.2 to the U.S. dollar today, up 1.9 percent since the start of 2018.
       Strong growth in the export of tea and horticulture, continued income from tourism and workers abroad, has also boosted Keny's foreign exchange reserves to an all-time high of US$8.832 billion from $7.089 billion in January. 
      Together with the recently extended precautionary arrangement of $989.8 million from the International Monetary Fund, this will provide the country with additional buffers against shocks.
       Last week the IMF approved Kenya's request for a 6-month extension of its stand-by arrangement so reviews can be completed by September, with the government committing to reduce its fiscal deficit and "substantially modifying interest controls."
       In September 2016 Kenya's government imposed a cap on banks' interest rates, despite objections by the IMF and banks, arguing that lenders were not passing on low rates to borrowers.
       But the cap of 4 percent above the CBK rate has essentially dented the pass-through effect of the central bank's policy decisions and private sector credit grew by only 2.1 percent in the 12 months to February, down from 2.4 percent in December.
       However, CBK added lending to manufacturing, real estate and trade sectors remained relatively strong, up by 13.1 percent, 8.3 percent and 5.9 percent, respectively.
       Kenya's  economy has been slowing in recent quarters and expanded by only 0.4 percent in the third quarter from the second quarter for annual growth of 4.4 percent, down from 5.0 percent.
       But the CBK's survey showed "almost unanimous optimism" by the private sector about 2018 based on a stable economic environment, favorable weather, confidence, continued public investment in infrastructure, expected direct flights to the U.S. and political stability.
       Uncertainties stem from U.S. trade policies, a resolution to the UK's trading relationship with the European Union and the pace of monetary policy normalization in advanced economies, CBK said.

Sunday, March 18, 2018

This week in monetary policy: Kenya, Morocco, Chile, Colombia, USA, Brazil, Paraguay, New Zealand, Philippines, Taiwan, Indonesia, UK & Russia

     This week - March 18 through March 24 - central banks from 13 countries or jurisdictions are scheduled to decide on monetary policy: Kenya, Morocco, Chile, Colombia, USA, Brazil, Paraguay, New Zealand, Philippines, Taiwan, Indonesia, UK 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.

MAR 18 - MAR 24, 2018:
COUNTRY             DATE               RATE           LATEST              YTD            1 YR AGO       MSCI
KENYA 19-Mar 10.00% 0 0 10.00%          FM
MOROCCO 20-Mar 2.25% 0 0 2.25%          FM
CHILE 20-Mar 2.50% 0 0 3.00%          EM
COLOMBIA 20-Mar 4.50% -25 -25 7.00%          EM
UNITED STATES 21-Mar 1.50% 0 0 1.00%          DM
BRAZIL 21-Mar 6.75% -25 -25 12.25%          EM
PARAGUAY 21-Mar 5.25% 0 0 5.50%
NEW ZEALAND 22-Mar 1.75% 0 0 1.75%          DM
PHILIPPINES 22-Mar 3.00% 0 0 3.00%          EM
TAIWAN 22-Mar 1.375% 0 0 1.375%          EM
INDONESIA 22-Mar 4.25% 0 0 4.75%          EM
UNITED KINGDOM 22-Mar 0.50% 0 0 0.25%          DM
RUSSIA 23-Mar 7.50% -25 -25 9.75%          EM

Friday, March 16, 2018

Oman central bank raises deposit rate 50 bps

      Oman's central bank raised its interest rate on capital deposits by 50 basis points to 1.50 percent, saying this change comes "after considering the prevailing interest rates within the Sultanate."
      In a statement dated March 14, the Central Bank of Oman added the revision in the rate takes effect from Jan. 1, 2018.
      The rate on capital deposits, was last changed on Feb. 2, 2015 when it was lowered by 50 basis points to 1.00 percent, with the decision retroactive to Jan. 1, 2015. The rate applies to the deposits that banks and financial companies are required to maintain at the central bank.
      Oman is a member of the six-nation Gulf Cooperation Council (GCC), whose currencies are pegged to the U.S. dollar. GCC also includes Saudi Arabia, UAE, Bahrain, Qatar, Kuwait.
      The rate hikes follows Saudi Arabia's rate hike on March 15 and comes a week before the U.S. Federal Reserve is expected to raise its rate on March 21.
      Unlike the other members of  GCC, Oman's central bank has not been raising its interest rates in synch with the Fed and the bank's former executive president has said he would not just blindly follow Fed decisions as Oman's economic cycle differs from that of the U.S.
      However, he added that rate increases may eventually become inevitable because of tightening liquidity in Oman's banking system.
       In September last year Oman's ruler, Sultan Qaboos, restructured the central bank's board, and appointed Tahir Salim al-Amri as new executive president.
       In a statement from October, the bank's board recognized the benefits of the peg to the U.S. dollar in terms of price stability, promoting economic growth, foreign direct investment and a stable interaction with the global economy.