Sunday, June 26, 2016

This week in monetary policy: Israel, Kyrgyzstan, Rwanda, Taiwan, Fiji, Romania, Moldova, Bulgaria, Czech Republic and Mexico

    This week (June 27 through July 2) central banks from 10 countries or jurisdictions are scheduled to decide on monetary policy: Israel, Kyrgyz Republic, Rwanda, Taiwan, Fiji, Romania, Moldova, Bulgaria, Czech Republic and Mexico.
    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.

JUN 27 - JUL 2, 2016:
COUNTRY       DATE           RATE      LATEST        YTD     1 YR AGO    MSCI
ISRAEL 27-Jun 0.10% 0 0 0.10%       DM
KYRGYZ REPUBLIC 27-Jun 6.00% -200 -400 9.50%
RWANDA 27-Jun 6.50% 0 0 6.50%
TAIWAN 30-Jun 1.50% -12.5 -12.5 1.88%       EM
FIJI 30-Jun 0.50% 0 0 0.50%
ROMANIA 30-Jun 1.75% -25 0 1.75%       FM
MOLDOVA 30-Jun 13.00% -200 -650 15.50%
BULGARIA 30-Jun 0.00% 0 -1 0.02%       FM
CZECH REPUBLIC 30-Jun 0.05% 0 0 0.05%       EM
MEXICO 30-Jun 3.75% 0 50 3.00%       EM

Policy remix needed to tackle pent-up risks, BIS says

    (Following press release was provided by the Bank for International Settlements. Click to read the 86th Annual Report of the BIS.)

    There is an urgent need to rebalance policy in order to shift to a more robust and sustainable global expansion and address accumulated vulnerabilities, the Bank for International Settlements (BIS) writes in its 86th Annual Report, calling for prudential, fiscal and structural policies to play a greater role.
    “We need policies that we will not once again regret when the future becomes today,” the BIS says in the report, released today, which describes a broad-based economic realignment as financial cycles mature, commodity prices fall, the dollar strengthens and global liquidity starts to tighten.
    In its flagship economic report, the BIS argues that growth rates are not far from historical averages. Still, it identifies a risky combination of unusually low productivity growth, historically high global debt and shrinking room for policy manoeuvre, which leaves the global economy highly exposed, not least to shocks and political risks.
    The recommended policy rebalancing should be incorporated into a long-term framework with a stronger focus on preventing costly financial boom-bust cycles, the BIS says. Prudential, fiscal and structural policies need to work alongside monetary policy, with a clear delineation of responsibilities.
    The structure of taxes and subsidies could be adjusted to remove the bias towards debt accumulation, for example by eliminating the tax advantage of debt over equity, and the quality of public spending could be improved by focusing more on investment. Throughout this process, prudently assessing fiscal space and maintaining sound public finances are key.
    Safer and stronger banks will also contribute to a more resilient economy since better capitalised banks lend more and stronger market-makers mean more robust market liquidity.
   Over the last year, major economies’ interest rates – adjusted for inflation – have edged further into negative territory and the stock of sovereign bonds trading at negative yields has hit record highs. The persistence of such exceptionally low rates has raised questions about their impact on the profitability and resilience of financial institutions, the sustainability of asset prices and the broader economy.
   The BIS authors look at concerns about the declining impact of monetary policy on the domestic economy and the increasing prominence of external channels of transmission, such as exchange rates.    
   They examine the merits of a financial stability-oriented monetary policy and conclude that leaning against the wind brings the greatest benefits when monetary policymakers take financial stability into account all the time, during both booms and busts.
    Other new research in the Annual Report discusses anomalies in financial markets; how financial risk-taking can undermine the traditional impact of currency moves on an economy; the role of global value chains in the globalisation of inflation dynamics and the treatment of sovereign debt on banks’ balance sheets.
    The BIS’s financial results, which were also published in the Annual Report, included a balance sheet total of SDR 231.4 billion (USD 326.1 billion) at end- March 2016 and a net profit of SDR 412.9 million (USD 581.9 million).

Friday, June 24, 2016

Central Bank News Link List - Jun 24: Brexit vote triggers shock, silence but market chaos averted

Here's today's Central Bank News' link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don't miss any important news.

Sri Lanka maintains rate, growth in line with expectation

    Sri Lanka's central bank left its key policy rates steady, as expected, saying growth in the first quarter was broadly in line with expectations while inflation is expected to ease and remain in mid-single digits in the medium term.
     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 inflation rate picked up speed in May to 4.8 percent from 3.1 percent in April, an acceleration that was expected due to May's increase in Value Added Tax (VAT) to 15 percent from 11 percent and the removal of certain exemptions to raise government revenue.
    The International Monetary Fund (IMF) - which earlier this month approved aid of US$1.5 billion, with immediate payment of $168.1 million, to help Sri Lanka meet balance of payment needs until it can adjust its macroeconomic policies - forecasts average inflation this year of 4.1 percent, up from 0.9 percent in 2015.
    For 2017 the IMF sees inflation rising to 5.3 percent before easing to 5.1 percent in 2018, 5 percent in 2019 and the same in 2020.
    Although Sri Lanka's economy expanded by an annual rate of 5.5 percent in the first quarter of the year, up from 2.5 percent in the previous quarter, the IMF said the economy was beginning to show signs of strain from the weak external environment and the challenges of policy adjustment.
    The IMF forecasts annual growth of 5.0 percent this year and the following two years compared with 4.8 percent last year.
    The linchpin of the IMF-led reform program is a reduction in Sri Lanka's fiscal deficit to 3.5 percent of Gross Domestic Product by 2020 from 6.9 percent in 2015 by rebuilding tax revenues, controlling expenditures and putting state enterprises on a more commercial footing.
    Revenue last year rose 1.5 percentage points to 13.1 percent of GDP, but this was mainly due to one-off measures and taxes from a temporary surge in vehicle imports. Meanwhile, expenditures rose by 2.1 points to 19.9 percent of GDP.
    The IMF also wants Sri Lanka to commit itself to a flexible exchange rate that will enable it to adjust to external forces and allow the central bank to rebuild foreign exchange reserves and focus more closely on price stability.
    Sri Lanka's rupee has been facing downward pressure for months due to capital outflows and has been depreciating steadily since late August until early this month when market sentiment improved following the IMF's approval of the Extended Fund Facility (EFF), which the central bank expects should help strengthen the country's external position.
    The rupee was trading at 146.6 to the U.S. dollar today, down 1.7 percent this year.
    Sri Lankan shares have been also been under pressure recently, with the benchmark Colombo index hitting its lowest close in two months on Thursday in response to a downwards revision of Sri Lanka's outlook to negative from stable by Moody's and a government proposal from June 15 to reintroduce capital gains, especially on land sales.

Thursday, June 23, 2016

Ukraine cuts rate another 150 bps and further cuts likely

    Ukraine's central bank continued to roll back its high interest rates by cutting its policy rate by 150 basis points to 16.50 percent and said it would "proceed with monetary policy easing to support the recovery of economic activity when it is not in conflict with achievement of inflation targets."
    The National Bank of Ukraine (NBU) has now lowered its key rate by 550 basis points this year and by 13.50 percentage points since starting the easing cycle in August 2015.
    From April 2014 through March 2015 the NBU hiked its rate by a total of 23.5 percentage points, with the key rate topping out at 30.0 percent to support the exchange rate of the hryvnia and prevent inflation from getting out of control.
    Inflation in May fell further to 7.5 percent from 9.8 percent in April, in line with the central bank's projections, and a far cry from an inflation rate of 60.9 percent in April last year.
    The deceleration in headline inflation is due to a strengthening of the hryvinia's exchange rate, improved commodity prices and better food supply, while there is "insignificant" upward pressure from demand, the central bank said.
    The rise of the hryvnia along with the sustained slowdown in inflation has also triggered a "significant decrease" in inflation expectations, with the NBU expecting headline inflation to reach its target of 12 percent, plus/minus 3 percentage points, by the end of this year and then 8.0 percent, plus/minus 2 percentage points, by the end of 2017.
    By late 2019 the central bank is targeting inflation of 5.0 percent.
    One of the reasons that inflation will pick up in the second half of this year is due to higher tariffs for public utilities, but the central bank said it has already taken this into account so it will not require a response by monetary policy.
    The hryvnia came under severe pressure in February 2014 following political unrest, the annexation of Crimea by Russia and armed conflict in Eastern Ukraine. Last year it lost 24 percent against the U.S. dollar although capital controls and rate hikes by the central bank slowed its fall.
    The hryvnia started out the year on a weak footing but since mid-March it has been rising and was trading at 24.8 to the dollar today, marginally down from 24.0 at the start of this year.
     A delay in a third tranche of funds from the International Monetary Fund under its $17.5 billion bailout program is keeping investors on the sidelines and the central bank said earlier this month the country risks damaging its reputation and economic stability if it fails to push through reforms that aim to limit the power of vested interests and modernize the economy.
    The IMF is expected to decide on disbursing the aid next month.

Philippines holds new rate, inflation risks now balanced

    The central bank of the Philippines left its new policy rate, the rate on its overnight reverse repurchase facility (RRP), unchanged at 3.0 percent, along with the other new rates that form the upper and lower bound of its interest rate corridor (IRC) that took effect on June 3.
    Bangko Sentral ng Pilipinas (BSP) said today's decision by its monetary board was based on the view that inflation continues to be manageable - a phrase often used by the BSP - with the latest forecast showing that inflation is likely to settle near the lower end of its target range this year and rise to the midpoint in 2017 and 2018.
    This forecast compares with its statement in May that inflation should settle within its target range this year and 2017. Last month it acknowledged that expectations had declined slightly.
     The BSP, which targets inflation of 3.0 percent, plus/minus 1 percentage point, said the overall balance of risks surrounding its inflation outlook was now deemed to be "broadly balanced," an improvement from last month when the risks were tilted to the downside.
    In addition to the recent recovery of oil prices, the BSP said improved rainfall should ease the upside risks to food and utility prices in coming months, although pending petitions for higher electricity rates remain an upside risk.
    Headline inflation in the Philippines rose to 1.6 percent in May from 1.1 percent in the two preceding months.
    But while the new information supports keeping rates steady, the BSP also said the continued uncertainty surrounding monetary policy in major advanced countries "requires a steady hand on policy settings in order to retain flexibility in the period ahead."
    The central bank introduced its new rate structure to improve the transmission of its policy to money markets and financial markets.
    The IRC comprises an overnight lending facility (OLF) that forms the upper bound of the rate corridor. This rate is 3.50 percent. The lower bound is comprised of the overnight deposit facility (ODF), which is set at 2.5 percent.
    The RRP is the central bank's benchmark rate and was cut to the current level of 3.0 percent from a previous 4.0 percent as part of the change. RRP is set in the middle of the rate corridor.

Norway maintains rate but raises forecasts slightly

    Norway's central bank maintained its key policy rate at 0.50 percent, saying that its forecast for the policy rate was little changed since March and "there are still prospects that the key policy rate may be reduced in the course of the year."
    Norges Bank, which cut its rate by 25 basis points in March, added that growth was likely to remain weak and inflation, which has been higher than 2.5 percent target, should ease due to lower wage growth and a somewhat stronger krone.
    In an update to its quarterly monetary policy report, Norges Bank maintained its forecast for the key policy rate to average 0.5 percent this year but for 2017 it raised it slightly to 0.3 percent from 0.2 percent forecast in the March report.
   For 2018 the policy rate forecast was also raised to 0.3 percent from 0.2 percent and for 2019 the forecast was raised to 0.6 percent from 0.5 percent.
    The central bank also raised its inflation forecast for this year to 3.3 percent from 3.1 percent forecast in March but lowered the 2017 forecast to 2.2 percent from 2.3 percent.
    For 2018 inflation is seen easing further to 1.9 percent from 2.1 percent previously seen and for 2019 to 1.7 percent, unchanged from March.
   The 2016 forecast for growth in mainland Norway was unchanged  at 0.8 percent while the 2017 forecast was lowered to 1.6 percent from 1.8 percent.
   For 2018 and 2019 growth was seen picking up to 2.1 percent and 2.3 percent, respectively, below the March forecast of 2.3 percent and 2.5 percent respectively.
    The central bank again voiced its concern over the rise in Norwegian home prices, saying vulnerabilities may increase if the rapid rise in house prices persists.
    The countercyclical capital buffer for banks is set to rise to 1.5 percent on June 30 from 1.0 percent  following earlier recommendations by the central bank to the finance ministry, which decides on the buffer every quarter.
   The buffer aims to strengthen the financial soundness of banks and their resilience to loan losses in a future downturn. The central bank's assessment of financial imbalances is based on credit-to-GDP ratios and credit has been expanding faster than economic growth for a while.
    While the growth of credit has eased in recent quarters, economic growth has declined so the ratio of credit has risen, and house prices have continued to accelerate, a sign that financial imbalances are building up.
    Norway's economy expanded by an annual rate of 0.7 percent in the first quarter of this year, up from 0.1 percent in the previous quarter while headline inflation was 3.4 percent in May, up from 3.2 percent in April.
    Earlier this month, Norway's Finance Ministery Siv Jensen told reporters that fiscal policy is now helping support the economy after monetary policy had done its job. In May the government said it would use 206 billion kroner of its oil income to help stimulate the economy by 1.1 percentage point.
    The exchange rate of Norway's krone typically fluctuates with crude oil prices and since mid-January it has been firming following a decline since mid-2014.
   The krone firmed further today following the central bank's decision, quoted at 8.17 to the U.S. dollar compared with 8.25 yesterday and 8.84 a the start of the year for a 8.2 percent appreciation this year.

Wednesday, June 22, 2016

Colombia raises rate 10th month in a row to curb inflation

    Colombia's central bank raised its policy rate for the 10 consecutive month and reiterated its statement from May that it must ensure that the recent shocks to inflation remain temporary and inflation converges towards its target in 2017.
    The Central Bank of Colombia raised its policy rate by another 25 basis points to 7.50 percent, as expected, and has now raised it by 300 points since embarking on a tightening cycle in September 2015. This year it has raised its key rate by 175 points.
    "Increases in food prices and the pass-through of nominal depreciation to consumer prices continue to exert inflationary pressures," the central bank said, showing little inclination to pause in its tightening campaign.
    Colombia's headline inflation rate rose to 8.2 percent in May from 7.93 percent in April, with the central bank again noting that the impact of the El Nino weather pattern on food prices and the magnitude of the depreciation of the peso had moved inflation and inflation expectations away from its target and also triggered indexation mechanisms.
    But core inflation eased to 6.55 percent in May from 6.69 percent and expectations embedded in public debt bonds for 2, 3 and 5 years eased to 4.0 percent and 4.5 percent from 4.3 percent and 4.7 percent in May.
   The central bank targets inflation of 3.0 percent, plus/minus 1 percentage point, and Colombia's government earlier this month raised its inflation forecast for this year to 6.5 percent.
    Colombia's economy has been slowed by low oil and commodity prices with annual growth the first quarter of 2.5 percent down from 3.4 percent in the previous quarter as domestic demand slowed less than expected.
    The central bank said its staff had retained its growth forecast of between 1.5 and 3.2 percent, with 2.5 percent as the most likely figure.

Thailand holds rate as economy, inflation recovering

    Thailand's central bank kept its policy rate at 1.50 percent, saying the economy is expected to continue to recover and inflation on track to return to its target, and it wanted to maintain some "policy space" room in light of the global risks it faces, including the U.K. vote on the European Union, financial stability concerns in China, a fragile global economic recover and monetary policy divergence among major advanced economies.
    The Bank of Thailand (BOT), which cut its rate by 50 basis points in 2015, added its monetary policy should remain accommodative and it was ready to use a mix of tools to ensure that monetary conditions were conducive to economic recovery and ensuring financial stability.
    The decision by the BOT was widely expected by economists despite the International Monetary Fund's (IMF) call earlier this month for the BOT to cut rates to help boost economic growth that is below that of most other countries in Southeast Asia.
    Thailand's Gross Domestic Product grew by a faster-than-expected annual rate of 3.2 percent in the first quarter of this year, up from 2.8 percent in the fourth quarter of 2015, and BOT Governor Veerathai Santipbrabhob recently said the economy was expected to expand 3.1 percent this year, up from 2.8 percent last year.
    Despite a fall in exports, Thailand's economy is growing on the back of strong public spending and improved tourism revenue.
    However, the BOT said there were still downside risks from slower-than-expected growth in its trading partners and fragile confidence in the private sector. But concerns linked to drought has subsided and prices of some agricultural commodities have shown signs of recovery.
    Inflation is also starting to rise, helped by domestic demand and higher prices of energy and food, the BOT said, adding that it expects inflation to return to its target band in the second half of this year.
    Thailand's headline inflation rate rose to 0.46 percent in May from 0.07 percent in April, the second month in a row of positive inflation after 15 months of deflation.
    The BOT targets headline inflation of 2.5 percent, plus/minus 1.5 percentage points.
    In contrast to its statement from March, the BOT made no mention of the exchange rate of the Thai baht, which has been stable this year. In March the BOT said the recent rise of the baht was not conducive to the economic recovery as its could be.
    The baht was trading at 39.8 to the U.S. dollar today, slightly weaker than 39.1 at the start of this year.

Tuesday, June 21, 2016

Morocco holds rate, raises RRR and inflation forecast

    Morocco's central bank left its key policy rate at 2.25 percent as it revised upwards its forecast for inflation this year to 1.6 percent from 0.5 percent forecast in March due to a sharp rise in food prices.
   The Bank of Morocco, which in March cut its rate by 25 basis points due to a downward revision in inflation expectations and weak non-agricultural growth, added that it was raising the required reserve ratio (RRR) by 300 basis points to 5.0 percent due to improved bank liquidity and would start to pay interest on the required reserves of "banks making more efforts in terms of lending."
   While the forecast for headline inflation this year was revised upwards, the central bank said the forecast for core inflation this year remained "virtually unchanged" at 0.6 percent.
    Headline inflation in 2017 is seen easing to 1.0 percent, down from the previous forecast of 1.4 percent, as the shock of higher food prices dissipates while core inflation is seen rising along with fuel and lubricants.
    Morocco's consumer price inflation rate eased to 1.6 percent in April from 1.8 percent in March while Gross Domestic Product grew by an annual 4.7 percent in the final 2015 quarter for full-year growth of 4.5 percent due to a 12.8 percent rise in agriculture value added and a 3.5 percent increase in non-agricultural activities.
    For 2016 the central bank raised its growth forecast to 1.2 percent 1.0 percent seen in March as agricultural production was seen expanding more than expected in March - at 9.0 percent - while non-agricultural growth was seen rising 2.8 percent.
    For 2017 the central bank expects growth to accelerate to 4.0 percent as agricultural value-added is expected to rise 10 percent and non-agricultural out put by 3.2 percent.
    Helped by a continued strong performance of the country's automotive industry, the central bank said exports were up by 2.0 percent at the end of May, with the current account deficit seen easing to 2.0 percent of GDP this year and 0.8 percent in 2017.

Hungary holds rate but may use unconventional tools

    Hungary's central bank left its base rate steady at 0.90 percent, as it pledged last month, but tempered its guidance of maintaining the current rate and loose monetary conditions for "an extended period" by saying it it may deploy "unconventional tools" if deemed necessary.
    The National Bank of Hungary (MNB), which in May ended its latest easing cycle after cuts totaling 45 basis points this year, said the country's economy was picking up again after decelerating at the start of the year and the disinflationary impact of the economy was gradually decreasing.
    This is a more optimistic view of the impact of domestic demand on inflation than last month when the central bank said that the real economy had a disinflationary impact over the policy horizon and inflation was first expected to approach the bank's 3.0 percent target in the first half of 2018.
    The optimism is based on recent data showing that Hungary's economy is bouncing back after a sharp slowdown in construction from lower drawdown of European Union funds and temporary factory shutdowns dented output in the first quarter.
    But industrial output already recovered in April with rising production, retail sales continued to expand in April, household consumption is expected to rise in coming quarters and unemployment remains low, with the consequence that the central bank expects the economy to pick up "markedly."
    The slowdown in the first quarter will result in a temporary widening of the negative output gap, but higher growth and the government's budget for next year will boost demand so this gap closes.
    Last month the central bank confirmed that it still expects growth this year of around 3 percent despite the slower-than expected deceleration in the first quarter.
    Hungary's Gross Domestic Product grew by only 0.9 percent year-on-year in the first quarter of this year, down from 3.2 percent in the final 2015 quarter.
    Headline inflation declined by 0.2 percent in May from 0.2 percent in April, while the rolling unemployment rate in the February-April period fell to 5.8 percent from 6 percent in the preceding period.
    Hungary's forint has been stable for the last 12 months but fell 0.5 percent in response to the central bank's guidance to 314.6 per euro. But it was largely unchanged from 314.7 at the start of this year.