Wednesday, October 28, 2020

Canada holds rate, trims QE and to focus on long bonds

     Canada's central bank left its benchmark interest rate steady but will reduce its purchases of bonds and focus on buying more longer-term bonds so the net effect is there is no reduction in the level of monetary stimulus, which it confirmed will continue until the economic recovery is well underway.
     The Bank of Canada (BOC) left its target for the overnight rate at the effective lower bound of 0.25 percent, unchanged since it was slashed three times in March by a total of 150 basis points to what it considers the "effective lower bound."
      Along with the rate cuts, BOC in March also began buying C$5 billion of government securities a week in the secondary market across a wide range of maturities.
      Today the bank's council said it would gradually reduce these purchases to $4 billion a week and recalibrate its quantitative easing (QE) program toward longer-term bonds that have a more direct influence on the borrowing rates that a most important for households and businesses.
     "The Governing Council judges that, with these combined adjustments, the QE program is providing at least as much monetary stimulus as before," BOC said, reiterating its guidance that it will keep the policy rate at the effective lower bound until the 2.0 percent inflation target is reached.
     The decision comes against a backdrop of an upward revision of the bank's growth forecast for this year to a contraction of 5.7 percent compared with an earlier forecast of a 7.8 percent decline due to a stronger-than-expected rebound in the summer.
      But growth in the fourth quarter is expected to slow markedly due to rising COVID-19 cases as the economy's transition to what BOC said was a "more moderate recuperation phase," with growth continuing to rely heavily on policy support.
     BOC lowered its 2021 growth forecast to 4.2 percent from 5.1 percent but maintained the 2022 forecast for growth of 3.7 percent. But in light of the long-lasting effects of the pandemic, the estimate for Canada's potential growth rate was revised down.
     Canada's inflation rate rose to 0.5 percent in September from 0.1 percent in the previous two months but is expected to remain below the bank's target range of 1.0 to 3.0 percent until early 2021, mainly due to lower energy prices.
      BOC forecast headline inflation of an unchanged 0.6 percent this year, 1.0 percent in 2021 and 1.7 percent in 2022, below 2019's 1.9 percent.

Kuwait holds key rate, cuts other rates to curb dinar rise

     Kuwait's central bank, which pegs its dinar currency to a weighted basket of currencies, left its benchmark discount rate steady but lowered the interest rate on other monetary policy instruments in response to a decline in U.S. interest rates which it said was putting upward pressure on the dinar.
     The Central Bank of Kuwait (CBK) kept its benchmark discount rate at 1.50 percent, unchanged since March 16 when it lowered its for the second time that month for a total cut of 125 basis points this year.
     But CBK cut its policy instruments that cover the entire interest rate yield curve up to 10-year terms, including its repo rate, term deposit rates, direct intervention rates and those on public debt by 0.125 percent, it said on Oct. 27.
     "This came amid continued decrease in interest rates on federal funds of the US Federal Reserve inching closer to zero-levels, which widened the margin tipping the scale on the side of the interest on the Kuwait Dinar as opposed to interest on the US greenback, thus bolstering the attractiveness of the Kuwaiti currency," CBK said.
     It added the move was part of its special measures to tackle the impact of COVID-19 on economic and banking conditions, including its earlier cuts to the discount rate.
     Between 1975 and 2002 Kuwait's dinar was pegged to a weighted basket of the currencies of its major trading partners but from 2003 to 2007 it dropped that and pegged it directly to the U.S. dollar.
     But after the dollar's decline starting in 2002, Kuwait in May 2007 reverted to its earlier exchange rate policy of pegging the dinar to an undisclosed weighted basket of currencies to protect the dinar's purchasing power and curb growing inflationary pressures.
     After falling in in late March to a low 0.315, the dinar has steadily firmed against the U.S. dollar to 0.305 on Oct. 21.
     In response to CBK's move, the dinar eased to 0.306 to the dollar today, down almost 1 percent this year but up 3 percent since the low on March 26.

Georgia holds rate due to rising uncertainty and risks

     Georgia's central bank left its benchmark interest rate steady for the second month in a row, citing uncertainties associated with an acceleration of the spread of COVID-19 and a rise in geopolitical risks, but added the pace and gradual exit from the tight monetary policy stance still depends on inflationary expectations and economic activity.
     The National Bank of Georgia (NBG) left its refinancing rate at 8.0 percent, unchanged since August when it cut it for the third time this year following earlier cuts in April and June for a total easing of 100 basis points.
     But between September and December 2019, NBG raised the rate four times and by a total fo 250 basis points to curb inflationary pressures from a decline in the lari's exchange rate.
     "Preliminary indicators still point to weak aggregate demand," the central bank said, adding economic activity in August was estimated to have contracted by an annual 5.3 percent, with an improvement due to a recovery in domestic demand, supported by fiscal stimulus, credit activity and remittances.
     In August the central bank forecast a 5.0 percent economic contraction this year, an estimated shared by the International Monetary Fund in September when it also said it was essential for the central bank to maintain exchange rate flexibility to manage the economic shock.
     But against the backdrop of a more widespread spread of the virus, the global economic recovery in 2021 is expected to be slower than previously expected and this will impact external demand. Domestic demand will be the main driver of growth next year.
     Georgia's gross domestic product contracted by 12.3 percent year-on-year in the second quarter and preliminary data show that revenue from international travelers had plunged by an annual 95 percent in September while the export of goods had risen for the first time since January to grow 8.6 percent.
     Georgia's inflation rate has been decelerating for the last five months and fell to 3.8 percent in September and NBG said it expects this declining trend to continue with inflation remaining close to its 3.0 percent target in 2021.
     Like most currencies, Georgia's lari tumbled in March, forcing NBG to intervene six times in the foreign exchange market. But after rebounding in April and May, the depreciation of the lari has continued and today it was trading at 3.22 to the U.S. dollar, up 8 percent from a record low of 3.48 at the end of March but still down 11 percent since the start of this year.

Tuesday, October 27, 2020

Armenia maintains rate amid Azerbaijan conflict, virus

      Armenia's central bank left its benchmark interest rate steady after cutting it four times earlier this year, saying the recent rise in coronavirus cases worldwide and the resulting uncertainty will cause a "certain" delay in the global economic recovery despite the positive economic developments seen in the third quarter of this year.
      The Central Bank of Armenia (CBA) kept its refinancing rate at 4.25 percent after cutting it by a total of 125 basis points this year after cuts in March, April, June and September.
      "Taking into account the above actual and expected macroeconomic developments, including a certain increase in the risk premium, the Central Bank Council considers it expedient to leave the refinancing rate unchanged," CBA said.
      In addition to an acceleration of a the spread of COVID-19 in the first half of October, CBA said the eruption of a military conflict with Azerbaijan last month over the disputed territory of Nagorno-Karabakh
"formed a negative environment in terms of both supply and demand developments."
      The outbreak of hostilities on Sept. 27 has led to a more volatile exchange rate for Armenia's dram but inflation eased to 1.4 percent in September from 1.8 percent in August and the central bank said it expects inflation to gradually rise and consolidate near its 4.0 percent target at the end of the forecast horizon.
      Armenia's gross domestic product shrank by an annual 13.7 percent in the second quarter of this year after growth of 3.9 percent in the first quarter and CBA said economic activity had declined by 7.5 percent in September from the same month last year.
      "Despite the ongoing fiscal stimulus, domestic demand was weaker than expected in the third quarter, driven mainly by a deeper declined in private consumption," CBA said, adding uncertainty over the prospects for economic growth is expected to rise, delaying a recovery of activity and demand.
     "In this situation, the Government envisages a significant expansionary fiscal policy," CBA said.


Monday, October 26, 2020

Kazakhstan holds rate, geopolitical risks limit cuts

      Kazakhstan's central bank kept its base rate steady but said growing geopolitical risks and "the persistence of uncertainty and the increased likelihood of external risks materializing limit the potential for lowering the base rate."
      The National Bank of the Republic of Kazakhstan (NBK) left its base rate at 9.0 percent, unchanged since July when it lowered it for the second time this year after a cut in April.
      Although NBK cut the rate by a total of 300 basis points in April and July, the net change for the year only amounts to 25 basis points as it raised the rate by 275 basis points in March in an emergency move to protect the exchange rate of the tenge that came under pressure from a collapse in the prices of oil, the country's main export.
      The central bank said its next policy decision in December would be based on updated forecasts of inflation and economic growth that will allow it to "assess the potential space for rate cuts given the achievement of the inflation target in 2021."
      Kazakhstan's tenge reacted negatively to the bank's decision, although this was largely expected, falling almost 0.5 percent to 430 to the U.S. dollar to be down 11.4 percent this year.
      The tenge has been very volatile this year and plunged 15 percent from March 3 to March 25. But helped by the March 10 rate hike and a rebound in oil prices, the tenge rebounded in May before resuming a steady decline from early June to October. 
      Kazakhstan's headline inflation rate stabilized at 7.0 percent in September and August and NBK said disinflationary factors were continuing to prevail due to subdued demand, declining real incomes and a slow recovery in business activity.
     Inflationary expectations have also declined, the bank added.
     Kazakhstan's economy shrank an annual 1.8 percent in the second quarter of this year, after growth of 2.7 percent in the first quarter and at the end of the third quarter gross domestic product had contracted by 2.8 percent although the economic recovery is continuing and the business climate index had turned positive in September after six months in the negative zone.
     Last month NBK forecast the economy would shrink between 2.0 and 2.3 percent in 2020 while inflation will reach the upper limit of its target band of 4.0 to 6.0 percent by the end of 2021.

Sunday, October 25, 2020

This week in monetary policy: Kazakhstan, Armenia, Georgia, Canada, Brazil, Japan, Fiji, Tajikistan, euro area, Azerbaijan, Malawi, Moldova, Bulgaria & Colombia

   This week - October 26 through October 31 - central banks from 14 countries or jurisdictions are scheduled to decide on monetary policy: Kazakhstan, Armenia, Georgia, Canada, Brazil, Japan, Fiji, Tajikistan, euro area, Azerbaijan, Malawi, Moldova, Bulgaria and Colombia..
     Following table includes the name of the country, the date of the next policy decision, the current policy rate, the local time a policy decision is announced, the result of the last policy decision, the change in the policy rate year to date, and the rate one year ago.
    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

OCT 26 - OCT 31, 2020:
KAZAKHSTAN26-Oct9.00%15:000-259.25%         FM
ARMENIA 27-Oct4.25%-25-1255.50%
CANADA28-Oct0.25%10:000-1501.75%         DM
BRAZIL28-Oct2.00%18:000-2505.00%         EM
JAPAN29-Oct-0.10%00-0.10%         DM
EURO AREA29-Oct0.00%13:45000.00%         DM
BULGARIA30-Oct0.00%000.00%         FM
COLOMBIA30-Oct1.75%-25-2504.25%         EM                    

Friday, October 23, 2020

East Caribbean holds rate, sees economy shrinking 16%

     The central bank for eight islands in the Eastern Caribbean again left its benchmark interest rate steady and forecast the region's economy would shrink 16.2 percent this year, cautioning a recovery depends on the continued resilience of health systems, containment of the COVID-19 virus, availability and access to vaccines, and fiscal and financial support.
     The Eastern Caribbean Central Bank (ECCB), the monetary authority for eight nations, left its benchmark discount rate at 2.0 percent after slashing it by 450 basis points at a special meeting of the bank's monetary council in April.
     The rate cut in April was the ECCB's first rate cut since 2003.
     At the council's previous meeting in July it also left the rate steady and forecast the region's economy would contract between 10 and 20 percent this year.
     "The COVID-19 pandemic has had an extremely damaging impact on the ECCB member countries through disruptions in the Travel and Tourism sector and Foreign Direct Investment," the council said following a meeting conducted via videoconference.
     The economic contraction is projected to be uneven across the eight islands, ranging from 5.5 percent to 30.0 percent, with countries that rely heavily on tourism and have limited fiscal space likely to have slower recoveries.
     In 2021 the ECCB forecast an economic rebound for the region, with growth of 5.1 percent, similar to its forecast in July.
     The ECCB added monetary and credit conditions in the ECCU have deteriorated during the first nine months of the year but the financial system had remained stable despite an elevated level of non-performing loans that is likely to rise following the expiration of the loan moratorium under the deferral program.
     As of Aug. 31, licensed financial institutions reported moratoria on 26,194 loans with an outstanding balance of $5.2 billion, or 39.3 percent of total loans.
    ECCB was set up in 1983 to maintain the stability of the Eastern Caribbean Currency (ECCU) and the banking system in its members: Anguilla, Antigua and Barbuda, the Commonwealth of Dominica, Grenada, Montserrat, St. Kitts and Nevis, Saint Lucia, and St. Vincent and the Grenadines.
    Members of ECCU use the East Caribbean Dollar as their common currency, and it has been pegged to the U.S. dollar at 2.70 since 1976. EC$ has existed since 1965.

Thursday, October 22, 2020

Israel maintains rate but boosts asset purchases

     Israel's central bank left its main interest rate steady but boosted its purchases of government bonds and said it would continue to implement an accommodative monetary policy after a second lockdown last month to prevent the spread of COVID-19 led to a sharp decline in economic activity.
     The Bank of Israel (BOI) kept its main interest rate at 0.10 percent, unchanged since April when it cut it for the first time in five years in response to the economic hit from the coronavirus.
     Prior to the April rate cut, BOI on March 23 launched a program to purchase 50 billion shekels of government bonds in the secondary markets to lower the cost of credit and boost economic activity.
     "In view of the crises continuing to impact Israel and the world, the Committee decided to increase the government-bond purchase program by NIS 35 billion and thus continue to support financing ability in the economy, in view of the strengthening of the coronavirus crises and its economic effects," BOI said, adding the bond purchases will allow it to lower the cost of credit for companies and households as a complementary tool to its short term interest rate policy.
    "The Monetary Committee will continue to operate the tools at its disposal to the extent necessary in order to implement the extent of monetary accommodation required, and to ensure the continued orderly activity of financial markets in Israel," BOI said, adding it will expand the use of its existing tools, including the interest rate tool and operate additional ones to the extent it assesses the crises is lengthening and moderate the negative economic impact.
     BOI also decided to extend credits to banks at a negative 0.1 percent against loans they give to small businesses at an interest rate not exceeding the prime rate plus 1.3 percent.
     After recovering following the first lockdown in the Spring, Israel's economy took a hit after a second lockdown was imposed on Sept. 18 after the country saw a surge in infections.
     Prior to the second lockdown, unemployment had stabilized around 11 to 12 percent but it then jumped to 19 percent in the second half of September as the number of unemployment rose by about 300,000, the central bank said.
     BOI's research staff has forecast two possible scenarios. Under the first, in which control over the pandemic is achieved, the economy is expected to contract by 5 percent this year and then expand by 6.5 percent in 2021.
     But in a more serious scenario, BOI sees growth contracting by 6.5 percent in 2020 and expand by just 1 percent in 2021, with debt also rising more.
     Israel's gross domestic product shrank by an annual 7.9 percent in the second quarter of this year after expanding by 0.5 percent in the first quarter. On a quarterly basis, GDP shrank 8.1 percent in the second quarter and shrinking 1.8 percent in the first quarter, meeting the technical definition of recession.
     Israel is also experiencing deflation, with consumer prices falling by 0.7 percent in September, the 6th consecutive month of deflation.
     Although the shekel is skirting with 10-year highs against the U.S. dollar, the BOI is more concerned with its trade-weighted level and against the euro - most of Israel's trade is with the euro area - the shekel has lost ground this year.
     After tumbling in March, the shekel has risen steadily against the dollar and was trading at 3.38 after today's decision, up 2.4 percent since the start of this year.
     But against the euro, the shekel was trading at 4.0 today, down 3 percent this year.

Turkey holds key rate but widens rate corridor, lira hit

     Turkey's central bank once again surprised financial markets by keeping its main interest rate steady but continued its recent policy of tightening monetary conditions through a variety of other tools by raising the upper bound of its interest rate corridor.
     The Central Bank of the Republic of Turkey (CBRT) kept its one-week repo rate steady at 10.25 percent but widened the margin between the late liquidity window lending rate and overnight lending to 300 basis points by raising the late liquidity rate by 150 points to 14.75 percent.
      Today's decision by the bank's monetary policy committee follows last month's surprise 200 basis point hike in the one-week repo rate, the first outright rate hike in two years, and a series of back-door measures to tighten policy in response to accelerating inflation and a steady drop in the lira.
     "As a result of fast economic recovery with strong credit momentum, and financial market developments, inflation followed a higher-than-envisaged path," CBRT said, adding financial conditions had tightened following its earlier steps to contain inflation expectations and risks to the outlook.
     "Accordingly, the Committee has decided to keep the policy rate unchanged, while enhancing flexibility in liquidity management and continuing with liquidity measures until inflation outlook displays a significant improvement," the bank added.
     After falling steadily since early August, Turkey's lira rose at the start of this week, likely in anticipation of another rate hike. But in response to today's decision, the lira nose-dived 2 percent to a new record low of 7.96 to the U.S. dollar and is now down 25.3 percent this year.
     Turkey's inflation rate has been steady the last three months at 11.75 percent in September, 11.77 percent in August and 11.76 percent in July, only slightly below a 2020-high of 12.62 percent in June.
     According to Reuters, 17 economists polled had expected CBRT to raise its rate between 100 and 300 basis points to ensure a positive real interest rate.
      Although CBRT said "the recovery in economic activity continues," it also noted the expected moderation in imports had begun due to a phasing out of policies to support the economy from the impact of COVID-19 while exports were recovering - helped by the level of the exchange rate and relatively low commodity prices - helping support the current account.
      Turkey's gross domestic product shrank by a quarterly 11 percent in the second quarter after the first quarter fell 0.1 percent. On a year-on-year basis, GDP contracted 9.9 percent in the second quarter after it rose 4.4 percent in the first quarter.
      "While global economic activity has shown signs of partial recovery in the third quarter following the normalization steps taken by several countries, uncertainties on global economic recovery persist," the central bank said, adding advanced and emerging economies are continuing to maintain expansive monetary and fiscal policies.

Wednesday, October 21, 2020

Mozambique holds rate as inflation seen rising in 2021

     Mozambique's central bank left its key interest rate steady for the second time, saying this decision was justified by a deterioration of the risks and uncertainties in the context of an expected rise in prices in 2021 against the backdrop of repressed economic activity.
     The Bank of Mozambique (BOM) kept its monetary policy rate (MIMO) at 10.25 percent, as in August, after lowering it twice this year (in April and June) by a total of 250 basis points. 
     Since April 2017, when BOM began cutting its rate, MIMO has been cut 13 times and by a total of 11.50 percentage points.
     Mozambique's inflation rate rose to 2.98 percent in September from 2.75 percent in August and BOM said it expects higher domestic prices next year as the government's price containment measures expire along with supply shocks.
     Nevertheless, BOM said inflation is still expected to remain in single digits due to weak demand as the economy is still expected to shrink this year and only recover slowly in 2021.
     Mozambique's gross domestic product shrank by an annual 3.25 percent in the second quarter of this year following growth of 1.68 percent in the first quarter.
     Since the previous meeting of BOM's monetary policy committee CPMO, it said risks and uncertainties had risen, pointing to the threat of a second wave of COVID-19 and the U.S. presidential election.
     Despite last year's peace agreement between the country's government and the main opposition group, which ended sporadic violence that dragged on since a civil war ended in 1992, Mozambique is still experiencing fighting with Islamist insurgents close to the northern border with Tanzania.
     The fighting threatens the development of Mozambique's huge offshore natural gas fields in the northern province of Cabo Delgado that were discovered in 2010 and are expected to deliver liquified natural gas in 2024, helping transform the impoverished country's economy.
     Earlier this month BOM proposed investing more than half of the country's estimated lifetime revenue of $96 billion from the LNG field in a sovereign wealth fund that would be controlled by the government but managed by the central bank.

Sunday, October 18, 2020

This week in monetary policy: China, Hungary, Uzbekistan, Namibia, Mozambique, Sri Lanka, Ukraine, Turkey, Uganda, Israel, Paraguay, Russia & Eastern Caribbean

    This week - October 19 through October 24 - central banks from 13 countries or jurisdictions are scheduled to decide on monetary policy: China, Hungary, Uzbekistan, Namibia, Mozambique, Sri Lanka, Ukraine, Turkey, Uganda, Israel, Paraguay, Russia and East Caribbean.
     Following table includes the name of the country, the date of the next policy decision, the current policy rate, the local time a policy decision is announced, the result of the last policy decision, the change in the policy rate year to date, and the rate one year ago.
    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

OCT 19 - OCT 24, 2020:
CHINA20-Oct3.85%0-304.20%         EM
HUNGARY20-Oct0.60%0-300.90%         EM
SRI LANKA22-Oct4.50%7:300-2507.00%         FM
UKRAINE22-Oct6.00%0-75015.50%         FM
TURKEY22-Oct10.25%14:00200-17514.00%         EM
ISRAEL22-Oct0.10%16:000-150.25%         DM
RUSSIA23-Oct4.25%13:300-2006.50%         EM
EAST CARIBBEAN23-Oct2.00%0-4506.50%