Tuesday, May 26, 2020

China cuts reserve ratio for large banks another 150 bps

     China's central bank, the People's Bank of China (PBOC), has lowered its reserve requirement for all large financial institutions by another 150 basis points to 11.00 percent, its second cut this year following a 50-point cut in January.
     China's large financial institutions include its four big banks: the Industrial & Commercial Bank of China, the China Construction Bank, the Agricultural Bank of China and the Bank of China.
     PBOC's cut in the reserve requirement on May 25 comes after China last week for the first time since 2002 dropped a annual target for economic growth, with Premier Li Keqiang saying the target was mainly scrapped because of the uncertainties from the global epidemic and trade, and the country's development is facing some unpredictable factors, according to news reports.
     Last year China targeted 6 to 6.5 percent annual economic growth, down from about 6.5 percent the previous year, reflecting the steady decline in growth since 14.2 percent in 2007.
    The cut to the reserve ratio came the same day Yi Gang, governor of PBOC said in a newspaper interview the country would continue to strengthen its economic policy and its efforts to lower interest rates.
     China has cut is benchmark interest rate, the Loan Prime Rate (LPR), twice this year by a total of 30 basis points and it currently stands at 3.85 percent.
     China's gross domestic product shrank 9.8 percent in the first quarter from the previous quarter and by 6.8 percent compared with the same quarter in 2019.
     In the interview Yi also said PBOC's measures since the outbreak of the coronavirus had amounted to 5.9 trillion yuan comprising cuts to reserve ratios and other lending facilities.
     In March China's state council, which is chaired by Premier Li, called on further reductions in the reserve requirement for both small and medium-sized banks, with PBOC on March 13 then lowering the reserve ratio by 50 to 100 basis points for banks that met inclusive financing targets.
     Since 2018 PBOC has cut its three different reserve ratios 12 times, releasing some 8 trillion yuan in long-term funds, of which 1.75 trillion yuan were released this year following three cuts this year, PBOC said in a statement.
     This includes the last cut to the reserve ratio of large financial institutions on Jan. 2, 2020, which freed up 800 billion yuan in funds, and the last cut to the reserve ratio of small banks that took place in two stages, each of 50 basis points, on April 15 and then May 15, freeing up 400 billion yuan.
     PBOC operates three different reserve ratios: one for large banks, which includes the state-owned banks; one for mid-sized banks, which include join-stock banks, and one for small banks, such as 4,000 rural banks, rural cooperative banks, credit cooperatives and village and town banks.
     As of May 15, the average reserve ratio of financial institutions was 9.4 percent, a decrease of 5.2 percentage points since the start of 2018
     PBOC today also announced its first liquidity injection since late March via a 7-day reverse repo operation of 10 billion yuan at an unchanged 2.20 percent, saying this was "in order to keep the liquidity adequate at a reasonable level in the banking system."


Monday, May 25, 2020

Israel maintains rate as economy seen contracting less

     Israel's central bank left its main interest rate unchanged at 0.10 percent and while its staff now sees less of a economic contraction this year than it forecast last month, the monetary policy committee still left the door open for further easing if the crises were to continue.
     In April the Bank of Israel (BOI) cut its key rate for the first time in five years in response to the economic slowdown from measures to contain the COVID-19 pandemic and has also been using a range of other monetary tools to boost accommodation and ensure the orderly functioning of financial markets.
     "The Committee will expand the use of the existing tools, including the interest rate tool, and will operate additional ones, to the extent that it assesses that the crises is lengthening and it is necessary to achieve the monetary policy goals and to moderate the negative economic impact created as a result of the crises," BOI said.
     But compared with its last policy statement in April, BOI staff is more upbeat as some of the restrictions imposed to contain the spread of the coronavirus have been lifted.
    Real time data point to a recovery of economic activity in some industries, though activity is still low and in other industries where limitations have not been removed, activity remains around the lowest level.
     In a special update to its economic forecast, the bank's staff now sees an economic contraction this year of 4.5 percent, less than April's estimate of a 5.3 percent contraction.
     In 2021 Israel's gross domestic product is seen expanding 6.8 percent, down from April's forecast of 8.7 percent, assuming there won't be another wave of infections and restrictions.
     BOI said the first estimate of gross domestic product in the first quarter shows an annual 7.1 percent contraction.
     The gradual removal of restrictions after the Passover holiday is reflected in economic activity but the recovery is expected to take a long time and the adverse impact will be notable, BOI said.
     Israel's shekel was volatile in March, plunging just over 9 percent from March 1 to March 18 before the central bank offered $15 billion in currency swaps, helping the shekel firm so it was only down 2.8 percent by the end of the month against the U.S. dollar.
    This month it has been more stable, trading at 3.52 to the dollar today to be down 1.7 percent since the start of the year.
     BOI noted the shekel was now back to its pre-crises level, saying "to the extent that the exchange rate stabilizes at this level, it will weigh on the recovery of exports, particularly in view of the decline in global demand, and on the return of inflation to within the target range."
     Israel's inflation rate has decelerated sharply, with consumer prices down 0.6 percent in April from zero percent in March. In April BOI's staff forecast inflation this year would average a negative 0.8 percent before rising to a positive 0.9 percent in 2021.
     The fall energy prices has put downward pressure on inflation worldwide and BOI said short-term inflation expectations are below its target range of 1.0 to 3.0 percent while medium and long-term expectations are within its range.
     "At this point, there are no signs of an inflationary impact from the adverse shock to supply," BOI said, adding the crises has made it more difficult to calculate and analyze the meaning of changes to prices.

Sunday, May 24, 2020

This week in monetary policy: Kyrgyzstan, Israel, Hungary, Kenya, Fiji, South Korea, Poland, Nigeria, Gambia, Bulgaria & Colombia

    This week - May 24 through May 30 - central banks from 11 countries or jurisdictions are scheduled to decide on monetary policy: Kyrgyz Republic, Israel, Hungary, Kenya, Fiji, South Korea, Poland, Nigeria, Gambia, Bulgaria and Colombia.
    The Central Bank of Nigeria had originally scheduled its monetary policy meetings for Monday and Tuesday, May 25 and May 26, but changed the meeting to a one-day meeting on Thursday, May 28 after Monday and Tuesday were declared Eid-el-Fitr holidays, which marks the end of the month-long Ramadan.
    The Central Bank of the Republic of Colombia normally doesn't hold monetary policy meetings during the months of February, May, August and November. However, on May 13 it decided it would evaluate monetary policy and economic conditions in May, August and November this year due to the exceptional circumstances facing the country's economy.
    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, 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.

MAY 24 - MAY 30, 2020:
ISRAEL25-May0.10%-15-150.25%         DM
HUNGARY26-May0.90%000.90%         EM
KENYA27-May7.00%-25-1509.00%         FM
SOUTH KOREA28-May0.75%0-501.75%         EM
POLAND28-May0.50%-50-501.50%         EM
NIGERIA28-May13.50%0013.50%         FM
BULGARIA29-May0.00%000.00%         FM
COLOMBIA 29-May3.25%-50-1004.25%         EM

Saturday, May 23, 2020

Lesotho cuts rate 4th time in 2020 as economy to shrink

     Lesotho's central bank lowered its key interest rate for the fourth time this year and slashed its growth forecast for this year to a contraction of 5.7 percent.
     The Central Bank of Lesotho (CBL) cut its rate by another 50 basis points to 3.75 percent and has now cut the rate 275 points this year following cuts in January and at extraordinary meetings of its monetary policy committee in March and April.
     Since July 2019, when CBL began its current easing cycle, it has cut the rate 325 basis points.
      "The rate, set at this level, will ensure that the domestic cost of borrowing and lending will be aligned with the cost of funds elsewhere in the region," CBL said, lowering its target for the floor of net international reserves to US$530 million from $660 million.
     "The NIR target remains consistent with the maintance of the exchange rate peg between the loti and the South African rand.
     CBL's rate cut was decided at a meeting of its policy committee on May 22, rather than on May 26 as scheduled. On May 21 the South African Reserve Bank (SARB) cut its policy rate by 50 basis points to 3.75 percent, its fourth rate cut this year.
      Lesotho is surrounded by South Africa and its economy relies on inflows and workers' remittances. Along with Namibia and Eswatini (former Swaziland), Lesotho is part of the rand monetary area that uses South Africa's rand as a common currency. In 1980 Lesotho introduced its own currency, the loti, which trades at par with the rand.
    "The domestic economy has generally been weak," CBL said, adding measures of economic activity had declined 0.6 percent in March compared with a 0.2 percent decrease in February.
     The labour market showed a decline in employment in both manufacturing and migration mineworkers, consistent with lower demand for some of the large firms' products, while government employment had improved slightly, CBL said.
     "While economic forecasts are likely to change, the economy is expected to contract by 5.7 per cent in 2020 mainly due to COVID-19 infection and control measures," CBL added.
     In March CBL forecast growth this year would be lower than its earlier forecast of 2.2 percent and 2021 growth of 4.1 percent.
     In 2019 Lesotho's economy grew an estimated 2.6 percent based on strong mining performance and a recovery in textiles.
     Lesotho's inflation rate eased to 4.0 percent in March from 4.2 percent in February while gross international reserves rose to 4.7 months of import cover from 4.3 months in the first quarter.


Friday, May 22, 2020

India cuts rate 7th time as data reveals economic damage

     India's central bank cut its benchmark repo rate for the second time this year and for the 7th time in 15 months at a surprise monetary policy meeting and said it would "continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.
     The Reserve Bank of India (RBI) cut its repo rate by 40 basis points to 4.0 percent and has now cut it by 115 points this year following the first cut on March 27.
     "The recent release of macroeconomic data, that for the first tine revealed the damage wrought by COVID-19, brought forward the need for an off-cycle meeting of the monetary policy committee (MPC) in lieu of the scheduled meeting during June 3-5, 2020," said RBI Governor Shaktikanta Das.
      Since February 2019, when the RBI began easing its policy to boost the economy in response to slowing global growth, the repo rate has been cut seven times and by a total of 250 basis points.
     RBI today also lowered its reverse repo rate by 40 basis points to 3.35 percent and has now cut it by 155 points this year.
     At the previous policy meeting on April 17 the repo rate was maintained but the reverse repo rate was cut by 25 basis points to 3.75 percent to encourage banks to deploy a surplus of liquidity in the banking system to businesses following large injections by itself and the government.
     "The MPC is of the view that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated, and various sectors of the economy are experiencing acute stress" from the lockdown over the past two months, RBI said, adding:
     "High frequency indicators point to a collapse in demand beginning March 2020 across both urban and rural segments."
      RBI pointed to a plunge in electricity consumption while investment activity and private consumption have "suffered precipitous declines" that is reflected in a "collapse" in capital goods production and a large retrenchment in the output of consumer durable and non-durables.
     Private consumption accounts for some 60 percent of domestic demand and the production of consumer durables fell 33 percent in March and the output of non-durables 16 percent, Das said, adding industrial production shrank close to 17 percent in March, with manufacturing down 21 percent.
      India's exports suffered their worst slump in the last 30 years as the virus paralyzed world proaction and demand, with merchandise exports down 60.3 percent in April and imports contracted 58.6 percent.
     Agriculture provides the only silver lining, with summer sowing of rise, pulses and oilseeds progressing well and total area sown up by 43.5 percent in the current season while the winter season promises to be a number year, RBI said.
     Even though India's government may lift the lockdown by the end of May, RBI said economic activity, apart from agriculture, is likely to remain depressed in the first quarter of the current 2020-21 year, which began April 1, and may remain subdued in the second quarter due to social distancing measures and the temporary shortage of labour.
     Although there is heightened uncertainty about the duration of the pandemic and how long measures remain in place, RBI expects the economy to begin recovering in the third quarter and then gain momentum in the fourth quarter as supply lines are restored to normalcy and demand gradually revives.
     "On the other hand, upside impulses could be unleashed if the pandemic is contained, and social distancing measures are phase out faster," RBI said.
      Economic growth in the current fiscal year is estimated to remain negative.
     The outlook for inflation also remains uncertain but the usual spike in food inflation in April is expected to be moderate and the forecast for a normal monsoon season also portends well.
     Together with low prices for oil, metals and other industrial raw materials, input costs for domestic firms will remain low and deficient demand will restrain upward pressure on core inflation.
      RBI said it expects headline inflation in the third and fourth quarters of 2020-21 to remain below its target of 4.0 percent. In March India's headline inflation eased to 5.84 percent.
     In addition to past rate cuts, injection of liquidity in both rupees and foreign exchange to keep the financial system and markets functioning, RBI today announced additional measures to support exports and imports, improve the functioning of markets, ease financial stress and constraints faced by state governments.

Thursday, May 21, 2020

BOJ launches 3rd funding measure aimed at SMEs

     The Bank of Japan (BOJ) launched a third measure aimed at supporting small and medium-sized firms affected by the spread of the Covid-19 pandemic and extended the duration of all three measures by another 6 months until the end of March 2021.
     Japan's central bank noted its existing measures of purchasing commercial paper and corporate bonds, with a maximum amount outstanding of some 20 trillion yen, and the 25 trillion yen Special Funds-Supplying Operations to Facilitate Financing in Response to the Novel Coronavirus.
     In its statement following an unscheduled policy board meeting that was announced on May 19, the BOJ said it would add a new fund-provisioning measure based on eligible loans from banks based on the government's 30 trillion yen emergency economic support plan.
     The total size of these three measures aimed a businesses, which will be known as "the Special Program," will be about 75 trillion.
     "By conducting these measures, the Bank will continue to support financing mainly of firms and to maintain stability in financial markets," BOJ said, reiterating that it is closely monitoring the impact of Covid-19 and "will not hesitate to take additional easing measures if necessary."
      Under its new fund-providing measure, BOJ will provide funds at a loan rate of zero percent while a positive interest rate of  0.1 percent will be applied to the outstanding balances of banks' current accounts that correspond to the amounts of loans provided through this measure.
      The BOJ's policy board also affirmed the key elements of its current monetary policy framework known as "yield curve control," which includes a negative interest rate of 0.1 percent on banks' excess reserves.
     It also confirmed decisions taken at its regular meeting in April in which it boosted its asset purchases and scrapped an earlier annual limit of buying 80 trillion yen of Japanese government bonds (JGBs) in favor of buying bonds "without setting an upper limit" so the 10-year yield remains around zero percent.
     BOJ confirmed it would be buying exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITs) to their amounts outstanding increase at an annual pace with the upper limit of some 12 trillion yen and some 180 billion yen, respectively.
     As far as commercial paper and corporate bonds, BOJ said it would maintain their outstanding amounts at about 2 trillion and 3 trillion yen, respectively.
     However, BOJ will now undertake additional purchases of both these assets classes until the end of March 2021, as compared with April's target of September 2020, with the upper limit of 7.5 trillion yen for each asset. In April the additional purchases were raised to the 7.5 trillion from an earlier 1 trillion for each asset.
     Data released today showed Japan's consumer price inflation fell to only 0.1 in April from 0.4 percent in the previous two months and is now at the lowest level since November 2016.
    The drop in inflation is bound to ignite concern that BOJ is losing its fight against deflation.
    Japan officially fell into recession in the first quarter of this year as its gross domestic product shrank 0.9 percent following a fall of 1.9 percent in the fourth quarter of 2019, the country's first recession since late 2014.
     On an annual basis, GDP shrank 2.0 percent in the first quarter after shrinking 0.7 percent in the previous quarter. 
     At its April policy meeting, the BOJ slashed its forecast for growth and inflation.
     BOJ forecast the economy would shrink between 0.4 percent and 0.1 percent in the 2019 fiscal year, which ended on March 30, down from its January forecast of growth of 0.8 to 0.9 percent.
     For fiscal 2020, which began on April 1, BOJ forecast the economy would shrink a further 5.0 to 3.0 percent before expanding between 2.8 and 3.9 percent in fiscal 2021.

     BOJ forecast consumer prices would decline 0.7 to 0.3 percent in the current fiscal 2020 before rising to 0.0 to 0.7 percent in fiscal 2021, well below its 2.0 percent target.


Turkey cuts rate 9th time, signs of economy bottoming

     Turkey's central bank cut its key interest rate for the fifth time this year and for the ninth time since July last year, saying economic activity showed signs of bottoming in the first half of May after the government began to normalize the economy from measures to contain the coronavirus while inflation is in line with projections.
     The Central Bank of the Republic of Turkey (CBRT) cut its policy rate, the one-week repo rate, by another 50 basis points to 8.25 percent and has now cut it by 375 points this year following cuts in every month since the start of the year.
     Since July 2019, when Murat Uysal was installed as new governor of the central bank, rates have been cut 15.75 percentage points.
     The rate cut was in line with expectations.
     As in recent months, CBRT said maintaining a sustained process of disinflation requires a "cautious monetary stance" and this stance will be determined by considering the trend of underlying inflation.
     Turkey's inflation rate eased to 10.94 percent in April from 11.86 percent in March despite the recent depreciation of the Turkish lira, which hit new record lows two weeks ago.
     But the decline in international commodity prices, especially oil and metals, had countered some of the upward pressure on inflation from the lower lira and the disinflationary effects of lower demand was estimated to have increased, CBRT said.
     Although consumer prices might rise in the short term due to seasonal and pandemic-related effects on food prices, the disinflationary effects of lower demand will become more prevalent in the second half of the year, it added.
     "Accordingly, considering all factors affecting the inflation outlook, the Committee decided to make a measured cut in the policy rate," the central bank said, adding the outlook for inflation was in line with its projections for the end of the year.
     Last month CBRT lowered its forecast for inflation to end this year at 7.4 percent from an earlier forecast of 8.2 percent, and then to fall further to 5.4 percent by the end of 2021 before stabilizing around the 5.0 percent target in the medium term.
     Turkey's lira hit a new record low of almost 7.3 to the U.S. dollar on May 7 but has since firmed over optimism the central bank will be able to agree on a swap line with the U.S. Federal Reserve to ensure dollar funding to meet its debt service obligations.
     Today the lira was trading at 6.79 to the dollar, up 7 percent since the low on May 7 but down 12.4 percent since the start of this year and down 22 percent since the start of 2019.
      Economic activity in Turkey was following an upward trend in the first two months of the year but then began to weaken by mid-March due to the impact of the COVID-19 pandemic on trade, tourism and domestic demand.
     CBRT said high-frequency indicators showed signs of bottoming-out in the first half of May and despite the fall in tourism and exports, the current account is expected to follow what is said was a "moderate course" this year due to the restraining effects of commodity prices and imports.

Wednesday, May 20, 2020

Zambia cuts rate as country faces 1st recession in 20 yrs

     Zambia's central bank cut its policy rate for the first time in more than two years to prevent a further deterioration in the economy that is already projected to shrink for the first time in more than 20 years.
     The Bank of Zambia (BOZ) cut its policy rate by 225 basis points to 9.25 percent, the lowest level since May 2013 when the central bank was in the midst of a tightening campaign that began in October 2012 and first ended in November 2015 when the rate topped out at 15.50 percent.
      From February 2017 BOZ then began easing and cut its rate by 575 basis points to 9.75 percent during the next year, with the final cut taking place in February 2018.
     The rate was then maintained until May 2019 when BOZ had to return to the tightening path due to accelerating inflation from the depreciating exchange rate and raised its rate twice to 11.50 percent by November that year.
      The rate comes comes against a backdrop of a continued acceleration in inflation due to higher fuel pump prices, electricity tariffs, food prices and a pass-through of the depreciation in the kwacha.
     And although the projected path for inflation is higher than BOZ forecast in February, it said inflation will trend towards the upper bound of its 6-8 percent target range.
     This upward pressure on inflation is expected to come from persistently high fiscal deficits, rising external debt service payments, accumulation of domestic arrears, high production costs, and dampened copper prices and exports earnings from a weak global economy.
     But improvements in maize output and subdued domestic demand from the COVID-19 pandemic  could result in inflation falling faster than expected, BOZ added.
     Zambia's inflation rate rose to 15.7 percent in April from 14 percent in March, mainly from the lower exchange rate of the kwacha.
    Zambia's kwacha has been weakening since September 2018 but the pace accelerated sharply following the outbreak of the coronavirus, compounding existing concern over the country's high debt service and debt levels.
     Last month Zambia's finance ministry was reported to have contacted banks regarding restructuring of up to $11.2 billion of foreign debt.
     With the pandemic set to boost fiscal deficits and drain international reserves, the kwacha fell almost 17 percent during March.
     But since early April the kwacha has firmed and was trading at 18.2 to the U.S. dollar today, down 23 percent this year. To ease some of the pressure on the kwacha, BOZ has provided support, it said.
     Fiscal pressures are expected to heighten this year, with BOZ projecting a 14.8 billion kwacha decline in revenue along with the higher cost of servicing debt from a lower kwacha.
     "The fiscal deficit in 2020 is bound to exceed the 5.5% budget target," BOZ said, adding gross international reserves had declined to US$1.393 billion at the end of March from US$1.449 billion at the end of December due to debt service payments.
      "With the COVID-19 pandemic, the already challenged domestic macroeconomic environment has worsened," BOZ said, forecasting a contraction of 2.6 percent this year following growth of 1.9 percent in 2019 for the first contraction in gross domestic product in more than 20 years.
     The central bank's latest survey of businesses opinion and expectations indicated that economic conditions had worsened in the first quarter, with the volume of services, new orders and profitability all registering historic lows, BOZ said, adding the purchasing managers' index also showed a sharp decline in new orders and output amid falling consumer spending and company shutdowns.


Iceland cuts rate 9th time as economy seen shrinking

     Iceland's central bank continued its aggressive pace of monetary easing by cutting its interest rates for the fourth time this year and the ninth time in the last 12 months as it slashed its growth forecast for this year, mainly because the number of tourists visits are expected to plunge 80 percent.
     The Central Bank of Iceland's (CBI) monetary policy committee cut its key interest rate, the 7-day deposit rate, by another 75 basis points to 1.0 percent and has now cut it 200 basis points this year following cuts in February and two cuts at emergency policy meetings in March.
      Since May 2019 when the outlook for the North Atlantic island darkened, CBI has cut its key rate by 3.50 percentage points.
     "The MPC  will continue to monitor economic developments and will use the tools at its disposal to support the domestic economy and ensure that the more accommodative monetary stance is transmitted normally to households and businesses," CBI said.
     CBI added it had stopped offering one-month deposits, saying this would make its key rate more effective and the policy signal clearer.
     CBI's rate on overnight loans now stands at 2.75 percent, the rate on 7-day collateralised loans at 1.75 percent, the 7-day deposit rate 1.0 percent and the rate on current accounts 0.75 percent.
     In addition to the rate cuts, CBI has also joined the growing number of central banks that have been purchasing government bonds to keep interest rates low to ensure its easy policy is transmitted to households and businesses as governments boost spending by issuing bonds, draining liquidity and thus threatening to put upward pressure on interest rates.
     Iceland's economy has been hit by a series of adverse events in the last year prior to the outbreak of the COVID-19 pandemic.
     The tourism industry was hit by the collapse of a budget airline, the grounding of Icelandair's Boeing Max 737 aircraft and a high exchange rate. Exports were also hit from the failure of the capelin catch from rising ocean temperatures and and production difficulties in the aluminum industry.
     In an update to its economic forecast, CBI now sees gross domestic product shrinking by 8.0 percent this year, a sharp revision to the January forecast of 0.8 percent growth, with exports seen plunging 31.6 percent after falling 5.0 percent in 2019.
     "The outlook is for a steep rise in unemployment, which appears set to reach 12% in Q3 and measure just under 9% for the year as a whole," CBI said. In 2019 the unemployment rate was 3.6 percent with GDP expanding 1.9 percent.
      During the second half of this year economic activity is expected to gradually normalize but CBI cautioned that uncertainty remains unusually pronounced and economic developments will depend on the path of the pandemic and the unwinding of public health measures.
     Next year Iceland's economy is seen growing 4.8 percent as exports rise 23.6 percent. In 2022 the economy is seen growing another 2.8 percent.
      Iceland's inflation rate has been below CBI's 2.5 percent target and rose slightly to 2.2 percent in April from 2.1 percent in March.
      CBI expects inflation to rise marginally in coming months due to the fall in the krona but the slack in the economy will continue to weigh on prices. Consumer prices are seen rising 2.3 percent this year, down from 3.0 percent last year, and then 1.7 percent in 2021 and 1.6 percent in 2022.
      While Iceland's krona has depreciated since the virus reached the country, the impact on inflation has been offset by a drop in oil prices along with food and commodity prices. Inflation expectations, however, are largely unchanged and anchored to the target.
     "More firmly anchored inflation expectations provide monetary policy scope to respond decisively to the deteriorating economic outlook," CBI said.
     After rising in the three years from March 2015 to April 2018, the Icelandic krona has been depreciating and fell sharply in March this year. In May it has bounced back and rose further today to 142.4 against the U.S. dollar, but remains down 15 percent this year.

Thailand cuts rate 3rd time as economy shrinks, deflation

     Thailand's central bank cut its policy rate for the third time this year, as expected, saying the economy in 2020 will shrink more than it had expected due to the contraction in the global economy while headline inflation will also be more negative than expected and financial stability more vulnerable.
     The Bank of Thailand cut its policy rate by another 25 basis points to 0.50 percent and has now cut it 75 points this year following cuts in February and March.
     Since August 2019, when it began easing in response to the U.S.-China trade war, BOT has cut its key interest rate by 125 basis points.
      Looking ahead, the bank's monetary policy committee (MPC) said it would monitor growth, inflation and financial stability along with associated risks and the COVID-19 outbreak, and stands ready to use additional monetary tools if necessary.
      BOT's MPC voted 4 to 3 for the rate cut, with most members expecting a more accommodative monetary policy to alleviate the negative impact from the coronavirus pandemic.
      But three members of the committee wanted to maintain the rate and instead focus on expediting the effectiveness of financing and credit measures already announced.
       As a whole, the committee agreed financial institutions should work to ensure that debt restructuring, particularly for households and small- and medium-sized businesses, be carried out on a wider scale and liquidity problems should be addressed in a targeted and timely manner.
      Thailand's economy shrank 2.2 percent in the first quarter of 2020 from the fourth quarter, the second consecutive contraction following a 0.2 percent contraction in the previous quarter.
     On an annual basis, gross domestic product shrank 1.8 percent after expanding 1.5 percent in the previous quarter, the country's worst downturn since the fourth quarter of 2011.
     Thailand's economic and social development council, which compiles the data, cut its 2020 GDP forecast to a contraction of 5.0 to 6.0 percent from an earlier forecast of growth of 1.5 to 2.5 percent.
     In March BOT forecast the economy would shrink 5.3 percent this year.
     In addition to rate cuts, BOT has also taken measures to help SME's and corporate bond markets while the government has announced stimulus of 1.9 trillion baht, some 10 percent of GDP, including 1 trillion in borrowing, fueling concern this would drain liquidity from Thai bond markets, one of the biggest local-currency bond markets in Southeast Asia.
     "The Thai economy would contract more than the previous assessment," BOT said.
      BOT said tourism and merchandise exports had been affected more than it had expected, and domestic demand would also contract more than expected due to higher unemployment.
      BOT also said headline inflation this year will be more negative than it had expected due to the fall in energy prices and core inflation will remain subdue at low levels.
      Thailand's consumer prices fell 2.99 percent in April, the biggest drop since July 2009, after a fall of 0.54 percent in March, well below BOT's target of 2.5 percent, plus/minus 1.5 percentage points.
      Thailand's baht, which rose steadily from October 2015 through the end of 2019, fell through the first three months but has risen since the start of April.
      In response to the strong baht, which has made Thai exports less competitive, BOT had loosed foreign exchange regulations to enable more capital outflows.
      Today BOT noted the baht had risen against the U.S. dollar and regional currencies and "expressed concern over the bath that could strengthen and affect the economic recovery," adding it was closely monitoring financial markets.
      The baht continued to firm after the rate cut, trading at 31.8 to the U.S. dollar, but remains 5.7 percent below its level at the start of this year.

Tuesday, May 19, 2020

BOJ to hold unscheduled policy meeting Friday, May 22

     Japan's central bank will hold an unscheduled monetary policy meeting on Friday, May 22, "on possible new measures to provide funds to financial institutions."
     The Bank of Japan (BOJ) said in a statement the chairman of the policy board had called the meeting to discuss "monetary control matters" based on a staff report that was compiled following a request by Chairman Haruhiko Kuroda at the April 27 policy meeting.
     BOJ's next meeting on monetary policy was scheduled for June 15 and 16.
     Separately, Japan's Economy Minister Yasutoshi Nishimura told a news conference in Tokyo today that Japan was ready to deploy all available fiscal and monetary means to protect jobs and businesses from the widening fallout from the coronavirus pandemic, according to Reuters.
     He was also quoted saying it would not be good if Japan were to slip back into deflation just because there was too much concern over fiscal health.
      Japan officially fell into recession in the first quarter of this year as its gross domestic product shrank 0.9 percent following a fall of 1.9 percent in the fourth quarter of 2019, the country's first recession since late 2014.
     On an annual basis, GDP shrank 2.0 percent in the first quarter after shrinking 0.7 percent in the previous quarter.
     Inflation was steady at 0.4 percent in March and February.
     At its April policy meeting, the BOJ slashed its forecast for growth and inflation, and boosted its asset purchases, also known as quantitative easing.
     BOJ forecast the economy would shrink between 0.4 percent and 0.1 percent in the 2019 fiscal year, which ended on March 30, down from its January forecast of growth of 0.8 to 0.9 percent.
     For fiscal 2020, which began on April 1, BOJ forecast the economy would shrink a further 5.0 to 3.0 percent before expanding between 2.8 and 3.9 percent in fiscal 2021.
     BOJ forecast consumer prices would decline 0.7 to 0.3 percent in the current fiscal 2020 before rising to 0.0 to 0.7 percent in fiscal 2021, well below its 2.0 percent target.
     In its April policy statement, BOJ said it would not hesitate to take additional easing measures if necessary and expects short- and long-term interest rates to remain at their present or lower levels.
     BOJ also boosted it purchases of commercial paper and corporate bonds to 7.5 trillion yen for each asset class from an earlier limit of 1 trillion, and boosted the purchases of exchange-traded funds (ETFs) and real estate trusts (J-Reits) to 12 trillion and 180 billion, respectively, from an earlier limit of 6 trillion and 90 billion.
     BOJ also said it would be buying Japanese government bonds, or JGBs without an upper limit so the 10-year yields remain around zero percent.
      Previously, BOJ had a target of buying some 80 trillion yen of government bonds annually but it has also used a combination of negative interest rates - 0.10 percent on banks' excess reserves - and so-called "yield curve control" since September 2016 to ensure bond yields remain low.