Thursday, December 8, 2016

Ukraine holds rate, expects to cut in 2017 if risks ease

    Ukraine's central bank paused in its easing cycle by leaving its benchmark discount unchanged at 14.0 percent, saying this was "prompted by the need to mitigate inflation risks to enable the NBU to meet the inflation targets for 2017-18."
     But the National Bank of Ukraine (NBU), which has cut its rate by 800 basis points this year and 1,600 points since embarking on an easing cycle in August 2015, also said that if the risks to price stability abate, "the NBU will continue easing monetary policy next year as this move will help reduce borrowing costs and support economic growth."
    Today's decision by the NBU follows its guidance in October that it was going to continue to ease its policy as long as inflation continued to decelerate.
    Ukraine's inflation rate eased to 12.1 percent in November from 12.4 percent in October but was up from 7.9 percent in September and a 2016-low of 6.9 percent in June, a rise the central bank had expected due to an increase in administered prices and base effects.
    While the NBU said inflation was bound to reach its target of 12 percent by the end of the year and the targets for 2017 and 2018 were "within reach,"  it cautioned that the risks of a continued decline in inflation had risen, prompting its decision to "adopt a cautious approach to easing."
    The first risk stems from the government's decision to raise the minimum wage, which  in itself will only have limited impact on inflation. However, higher household income will fuel consumption and this could add an additional 1 percentage point to headline inflation, the bank said.
    "Accordingly, to buffer the effects from a rise in the minimum wage, NBU has decided to pursue a more restrained monetary policy," it said.
    In addition, the central bank said there was further uncertainty due to "heightened political tensions" and a slower pace of the implantation  of reform measures, which means there is a high probability of further delays to international financing payments.
    The NBU targets inflation of 12 percent this year and then 8 percent, plus/minus 2 percentage points in 2017, and 6.0 percent, plus/minus 2 points, for 2018.
    After plunging in 2014 and 2015, Ukraine's hryvnia has been more stable since April this year, trading at 25.6 to the U.S. dollar today, down 6.1 percent this year.
    Ukraine's economy grew by an annual rate of 1.8 percent in the third quarter, up from 1.4 percent in the second quarter as it continues to pull out of the recession in 2014 and 2015.
    In October the central bank lowered its forecast for growth in 2017 to 2.5 percent from 3.0 percent and the 2018 forecast to 3.5 percent from 4.0 percent. The 2016 forecast was left at 1.1 percent compared with a contraction of 9.9 percent in 2015.
    As part of its third review of Ukraine's economic reform program, the International Monetary Fund (IMF) on Nov. 18 said the country needed more time to implement policies, including an adoption of its 2017 budget that is consistent with targets, along with policies to safeguard financial stability and tackle corruption.

Serbia keeps key rate, sees inflation in target range

    Serbia's central bank left its key policy rate at 4.0 percent, saying it expects inflation to enter its tolerance range early next year due to rising domestic demand, helped by its past rate cuts, and a gradual rise in global oil prices and inflation.
     However, low food prices will continue to exert disinflationary pressures, said the Bank of Serbia (NBS), which has cut its rate by 50 basis points this year.
    As in the past, the NBS also underlined that "persistent uncertainties in the international financial and commodity markets also mandate caution in monetary policy conduct."
    Serbia's inflation rate rose to 1.5 percent in October from 0.6 percent in September, hitting the lower limit of its 2017 target range of 3.0 percent, plus/minus 1.5 percentage points.
    Last month the central bank lowered the inflation mid-point target to 3.0 percent from 4.0 percent.
    Serbia's economy grew by an annual rate of 2.6 percent in the third quarter, up from 1.9 percent in the secondquarter while the unemployment rate eased to 13.8 percent from 16.6 percent.
    Last month the central bank's vice-governor, Veselin Pjescic, was quoted as saying the central bank had room to lower its key rate.

ECB holds rates, extends but tapers asset purchases

    The European Central Bank (ECB) left its key interest rates steady but tapered and extended its asset purchases by another nine months "or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim."
    The ECB's current asset purchase program of 80 billion euros was set to expire at the end of March  2017 and the ECB will now lower the monthly purchases of bonds to 60 billion euros but continue with these purchases until the end of December 2017.
    But the ECB, which in March cut its benchmark refinancing rate to zero, added that if the economic outlook becomes unfavorable, "the Governing Council intends to increase the programme in terms of size and/or duration."
    To tackle the issue of a paucity of bonds available for purchase, the ECB broadened the maturity range of public sector bonds that it will buy by lowering the remaining maturity to one year from two years, and will buy bonds that have a yield below the ECB's deposit rate of minus 0.40 percent.
    ECB President Mario Draghi also confirmed the guidance that the central bank for 19 countries expects to keep its interest rates "at present or lower levels for an extended period of time, and well past the horizon of our net purchases."
    In addition to a refi rate of 0.0 percent and the deposit rate of minus 0.40 percent, the ECB's rate on its marginal lending facility was maintained at 0.25 percent.
    Draghi said the extension of the asset purchases was aimed at preserving the "very substantial degree of monetary accommodation" to ensure that inflation in the euro area reaches the ECB's target of below, but close to 2.0 percent.
    "This calibration reflects the moderate but firming recovery of the euro area economy and still subdued underlying inflationary pressures," Draghi said, confirming that the ECB "will act by using all the instruments available within its mandate" to achieve its inflation objective.
    Inflation in  the euro area rose to 0.6 percent in November from 0.5 percent in October but Draghi said this was largely due to higher energy prices and there "are no signs yet of a convincing upward trend in underlying inflation."
    Inflation is expected to pick up "significantly" at the turn of the year due to the comparison  with last year and then rise further in the next two years, Draghi said.
    In an update to its staff forecast, the ECB forecast annual inflation rate of 0.2 percent this year, rising to 1.3 percent in 2017, 1.5 percent in 2018 and 1.7 percent in 2019.
    This compares with its previous forecast from September of 0.2 recent this year, 1.2 percent in 2017 and 1.6 percent in 2018.
    Draghi said he expected the economic recovery in the euro area to "proceed at a moderate but firming pace," helped by improved corporate profitability, a recovery in investment, sustained gains in employment that is supporting private consumption, and a "somewhat stronger global recovery."
    "However, economic growth in the euro area is expected to be dampened by a sluggish pace of implantation of structural reforms and remaining balance sheet adjustments in a number of sectors," he added.
    Gross Domestic Product in the euro area grew by an annual rate of 1.7 percent in the third quarter of this year, the same rate as in the two previous quarters, and ECB largely maintained its outlook.
    For this year GDP is seen rising by 1.7 percent, unchanged from September, while the forecast for 2017 was raised to 1.7 percent from 1.6 percent. For 2018 the ECB expects unchanged growth of 1.6 percent and the same rate for 2019.
    "The risks surrounding the euro area growth outlook remain tilted to the downside," Draghi said.
    The euro, which fell sharply from May 2014 to March 2015, has been relatively stable since then though it has dropped in the  last month and fell further in response to the ECB's decision.
    The euro was trading at 1.065 to the U.S. dollar today, down from 1.08 yesterday, little changed since the start of this year.

Wednesday, December 7, 2016

Canada maintains rate as growth in line with forecast

    Canada's central bank left its benchmark Bank Rate at 0.50 percent, as widely expected, and said economic activity was largely as it had forecast with more moderate growth seen in the current quarter following a strong rebound in the third quarter from a very weak first half of the year.
    The Bank of Canada (BOC), which has maintained its rate since its last easing in July 2015, said consumption was robust and supported by new child benefits while the impact of federal infrastructure spending had yet to show up in economic data.
    Business investment and non-energy exports continue to disappoint and while there have been gains in employment there is still a significant amount of economic slack, in contrast the United States, the BOC said, almost foreshadowing next week's U.S. Federal Reserve decision.
    In October the BOC lowered its forecast for Canada's Gross Domestic Product to grow by 1.1 percent this year, down from 1.3 percent forecast in July, and to 2.0 percent in 2017, down from 2.2 percent. In 2018 the country's economy is still seen expanding by 2.1 percent.
    Canada's GDP grew by an annual rate of 1.3 percent in the third quarter, up from 1.1 percent in the second quarter when oil output was affected by wildfires in Alberta.
    Canada's inflation rate has risen in recent months but is still "slightly below expectations, largely due to lower food prices," the central bank said.
    Headline inflation in October rose to 1.5 percent in from 1.3 percent in September while core inflation eased to 1.7 percent from 1.8 percent in the previous two months.
    The BOC said the higher core inflation rate shows that economic slack is being offset by past exchange rate depreciation though this effect is dissipating.
    Canada's dollar has been trending downward against the U.S. dollar since 2013 but reversed course in mid-January this year when it rose sharply. But since early May it has been easing but was trading at 1.33 to the USD this morning, still up 4.1 percent since the start of the year. 

Namibia keeps rate, growth seen higher, inflation lower

     Namibia's central bank left its benchmark repurchase rate steady at 7.0 percent, saying economic growth is expected to improve in 2017 after a slowdown this year while inflation is expected to decline next year.
    The Bank of Namibia, which raised its rate twice this year by a total of 50 basis points, said inflation rose to an average of 6.6 percent in the first 10 months of this year, up from 3.4 percent in 2015, driven by higher prices of housing, water, electricity, fuel, transport and food.
    On a monthly basis, the annual inflation rate rose to 7.3 percent in October from 6.9 percent in September and is expected to average 6.7 percent this year before easing to 5.9 percent in 2017.
    The expansion in private sector credit, which worried the central bank earlier in the year, slowed to an annual rate of 11.8 percent in the first 10 months of the year compared with growth of 15.5 percent in the year-ago period. The slowdown was seen in both corporate and individual credit.
    Namibia's economy has been hit by lower output of diamonds, zinc, cement, blister copper along with a decline in construction, agriculture and transport. Wholesale and retail trade, however, has been positive.
   For 2016 the central bank forecast growth of 2.5 percent, down from 5.3 percent in 2015, but growth should improve next year.
    In September the International Monetary Fund (IMF) also estimated growth of 2.5 percent this year, with growth seen accelerating to above 5 percent in 2017 and 2018 as production from new mines ramps up.
   In the second quarter of this year, Namibia's Gross Domestic Product shrank by an annual rate of 1.2 percent from 3.4 percent growth in the first quarter.
    As of Nov. 30, the central bank said the stock of international reserves had  risen to N$25.0 billion from 22.6 billion in October , for import cover of about 3.3 months, up from 2.9 months previously reported.


India holds rate to gauge impact of bank note withdrawal

    India's central bank left its benchmark repo rate unchanged at 6.25 percent, surprising most analysts who had expected a rate cut, saying "it is prudent to wait and watch" how the withdrawal of large bank notes affect inflation and economic growth which is expected to take a hit from disruption to demand.
    In an unanimous 6-0 decision by the Reserve Bank of India's (RBI) recently-installed Monetary Policy Committee, said it was retaining its accommodative policy stance, but was also taking note of "heightened uncertainty" in global financial markets, with the imminent tightening of U.S. monetary policy already triggering bouts of volatility that could have macroeconomic implications for emerging market economies and the exchange rate of their currencies.
    Despite the decline in headline inflation to 4.2 percent in October from 4.39 percent in September, the RBI pointed to a "downward inflexibility in inflation excluding food and fuel which could set a resistance level for future downward movements in the headline."
    A surge in financial market turbulence and changes to crude oil prices could "put the inflation target for Q4 of 2016-17 at some risk," the RBI said, adding there had been a rise in the prices of several items - wheat, gram and sugar - that was masked by the decline in October inflation.
    While the withdrawal of bank notes could lead to a temporary reduction in inflation of 10-15 basis points in the current quarter from lower demand for perishable items, the RBI projected inflation of 5 percent in the fourth quarter of 2016-17, with risks tiled to the upside due to base effects in December and February and a possible rise in oil prices following OPEC's output cut.
    The RBI has a medium-term inflation target of 4 percent, plus/minus 2 percentage points.
     Earlier this month India's Prime Minister Narendra Modi banned 500 and 1,000 rupee bank notes - some 86 percent of currency in circulation - to root out corruption and tax evasion. The process has hit consumer demand and economists have lowered their economic short-term growth forecasts.
    The RBI said "supply disruptions in the backwash currency replacement may drag down growth this year," but this should be temporary and growth then rebound strongly.
    India's economy slowed in the second quarter to an expansion of 1.4 percent from the first quarter - on a year-to-year basis it grew by 7.3 percent, up from 7.1 percent - but the RBI said its outlook for the current 2016-17 financial year "has turned uncertain" after the slowdown and the impact of the bank note withdrawal that is still playing out.
    The RBI revised downward its growth forecast for 2016-17, which began on April 1, to 7.1 percent from 7.6 percent, adding that downside risks could arise from disruptions in cash-intensive sectors, such as retail trade, hotels, restaurants and transportation, and through a compression of aggregate demand in connection with the wealth effect.
    In a separate statement, the RBI said it was withdrawing the Nov. 26 temporary hike in the incremental cash reserve ratio (CRR) to 100 percent for deposits from Sept. 16 to Nov. 11 as of Dec. 10 with liquidity that will be released to be absorbed by a mix of securities that will be issued under the raised ceiling for issues unde the Market Stabilization Scheme (MSS) and the liquidity adjustment facility operations.

Monday, December 5, 2016

Australia maintains rate and neutral guidance

    Australia's central bank left its benchmark cash rate at 1.50 percent, as widely expected, and confirmed its neutral stance by saying the current policy was "consistent with sustainable growth in the economy and achieving the inflation target over time."
    But the Reserve Bank of Australia (RBA), which cut its rate by a total of 50 basis points in May and August, sounded slightly more optimistic about the outlook for the economy and inflation, saying a rise in commodity prices was helping boost national income while the global outlook for inflation was "more balanced than it has been for some time."
    Australia is a major exporter of iron ore, coal, gold, crude oil and natural gas, with the gradual rise in prices this year, following a slump in 2014, improving its terms of trade and thus export earnings.
    The country's Gross Domestic Product grew by an annual rate of 3.3 percent in the second quarter of this year, the fastest rate since the second quarter of 2012, but the RBA said it expects a slowdown by the end of the year before economic activity picks up again.
   "The outlook for business investment remains subdued, although measures of business sentiment remain above average," RBA Governor Philip Lowe said.
   Australia's inflation rate rose slightly to 1.3 percent in the third quarter from 1.0 percent in the second quarter, below the RBA's target of 2-3 percent, with continued subdued growth in labour costs expected to keep inflation low for some time.
    As in recent months, the RBA again said an appreciating exchange rate could "complicate" the economy's adjustment to lower mining investment.
    The Australian dollar has firmed since mid-January but remains far below par to the U.S. dollar that was seen from 2011 to early 2013. Today the Australian dollar, known as the Aussie, was trading at 1.34 to the U.S. dollar, up 1.2.2 percent since the start of this year.
    Last week Paris-based OECD said it expected Australia's growth to strengthen to an annual rate of about 3 percent by 2018 and the RBA will raise its rate sometime before the end of next year.

Sunday, December 4, 2016

This week in monetary policy: Australia, Argentina, India, Namibia, Canada, Poland, euro area, Serbia and Ukraine

    This week (December 4 through December 10) central banks from 9 countries or jurisdictions are scheduled to decide on monetary policy: Australia, Argentina, India, Namibia, Canada, Poland, the euro area, Serbia and Ukraine.
    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.

DEC 4 - DEC 10, 2016:
COUNTRY       DATE           RATE      LATEST        YTD     1 YR AGO    MSCI
AUSTRALIA 6-Dec 1.50% 0 -50 2.00%       DM
ARGENTINA 6-Dec 24.75% -50 -1,200             N/A       FM
INDIA 7-Dec 6.25% -25 -50 6.75%       EM
NAMIBIA 7-Dec 7.00% 0 50 6.50%
CANADA 7-Dec 0.50% 0 0 0.50%       DM
POLAND 7-Dec 1.50% 0 0 1.50%       EM
EURO AREA 8-Dec 0.00% 0 -5 0.05%       DM
SERBIA 8-Dec 4.00% 0 -50 4.50%       FM
UKRAINE 8-Dec 14.00% -100 -800 22.00%       FM

Wednesday, November 30, 2016

Brazil cuts rate 25 bps, larger cuts depend on inflation

    Brazil's central bank lowered its benchmark Selic rate by another 25 basis points to 13.75 percent, saying "the magnitude of monetary easing and a possible speeding up of its pace will depend on inflation forecasts and expectations."
     The Central Bank of Brazil, which has now cut its rate by 50 basis points following last month's cut - the bank's first rate cut since August 2012 - added the policy decision was unanimous by the members of its Copom committee and no bias was indicated.
    In its guidance, the central bank also said the pace of disinflation may intensify if the country's economic recovery is delayed further and is more gradual than anticipated.
    "The Committee judges that convergence of inflation to the 4.5% target over the relevant horizon for the conduct of monetary policy, which includes 2017 and 2018, is compatible with a gradual easing of monetary conditions," the central bank said.
    Brazil's inflation rate fell to 7.87 percent in October from 8.48 percent in September to the lowest rate since February 2015, with the central bank saying the drop was better than expected and partly due to lower food prices but also signs of more widespread disinflation.
    The central bank said 2016 inflation forecasts in the reference and market scenarios had dropped to around 6.6 percent from around 7 percent seen last month.
    Forecasts for 2017 show inflation around 4.4 percent and 4.7 percent, respectively, while
forecasts for 2018 for the two scenarios were around 3.6 percent and 4.6 percent, respectively.
     Brazil's economy shrank by 0.8 percent in the third quarter from the second quarter for the seventh quarter of contraction in a row. On an annual basis, Gross Domestic Product shrank by 2.9 percent compared with a decline of 3.6 percent in the second quarter.
    "The set of indicators released since the last Copom meeting suggests weaker-than-expected economic activity in the short run," the central bank said, adding forecast for growth this year and next year had been revised downward.
      The exchange rate of Brazil's real fell from August 2014 until it hit a record low of around 4.15 to the U.S. dollar in January this year. The real then firmed to around 3.12 in late October before again weakening in the last six weeks.
    The real was trading at 3.39 to the dollar today, still almost 17 percent higher than at the start of this year.

Angola holds rate and rules out devaluation of kwanza

    Angola's central bank maintained its benchmark BNA rate at 16.00 percent and said it was committed to preserve the value of the national currency, "which is why there will be no devaluation of the kwanza."
     The National Bank of Angola (BNA), which has raised its rate by 500 basis points this year to curb inflation, said it would continue to exchange 165.8 kwanza per U.S. dollar "so there is no need for market operators to change the prices of goods and services."
     The BNA also said it taken note of a deceleration in inflation due to its control of liquidity and an increases in the supply of goods and services.
    Angola's inflation rate rose to 40.4 percent in October, the highest rate since July 2004, from 39.4 percent in September, continuing the upward trend since 2015.
    The fall in crude oil prices from mid-2014 has lead to a shortage of foreign exchange in Angola, undermined government revenue and hit the exchange rate of the kwanza.
    The central bank, which has devalued the kwanza several times in the last year, said commercial banks had purchased US$1.268 billion in October, a decrease of 9.24 percent.
    In October credit to the economy rose by 0.42 percent while gross credit to the central government rose 0.82 percent.
    In September the International Monetary Fund (IMF) forecast 1.25 percent output growth in 2017, up from zero growth this year, due to a recovery in the non-oil sector from higher public spending.
    Inflation was forecast to reach 45 percent by the end of the year before declining to 20 percent next year as tight monetary conditions and a stable kwanza supports disinflation.
    The IMF also said monthly inflation had started to subside and while sales of foreign exchange had helped ease pressures on the market, it added that greater exchange rate flexibility, along with supporting macroeconomic policies, would be essential to maintain the exchange rate, prevent a misallocation of resources and accelerate growth.


Monday, November 28, 2016

Sri Lanka maintains rates as credit growth decelerates

    Sri Lanka's central bank maintained its key policy rates, saying the growth of credit had decelerated as it had expected and demand pressures are expected to remain well contained so "inflation is expected to remain stable in mid-single digit level in the period ahead."
    The Central Bank of Sri Lanka has raised its two key rates by 100 basis points this year to slow the growth in private sector credit from commercial banks, which eased to annual growth of 25.6 percent in September from 27.3 percent in August and 28.5 percent in July.
    Nevertheless, broad money grew by an annual rate of 18.4 percent in September, up from 17.3 percent in August, as public sector borrowing expanded.
    Liquidity in the domestic money markets, however, have returned to a balanced level, the central bank said, adding this will help stabilize market rates at current levels.
    Sri Lanka's inflation rate rose to 4.2 percent in October from 3.9 percent in September, with changes in taxes - Value-Added Tax has been raised to 15 percent and a Nation Building Tax began on Nov. 1 - expected to have a one-off impact while the overall impact of the 2017 budget on inflation is seen as favorable.
   The central bank noted the trade deficit had contracted by 12 percent in September from the same month last year as export earnings grew for the second consecutive month while import expenditure declined.
   Gross official reserves were estimated at US$6.1 billion at the end of October, down from $6.5 billion end-September while the exchange rate of the Sri Lankan rupee was trading at 148.4 to the U.S. dollar today, down almost 3 percent since the start of this year.
    Economic activity in Sri Lanka in the second quarter of this year was hit by adverse weather, with growth decelerating to an annual rate of 2.6 percent from 5.2 percent in the first quarter.
    The central bank raised its two key rates, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) in February and July.    SLFR now stands at 7.0 percent and the SDRF at 8.50 percent.