Thursday, February 11, 2016

Peru raises rate 25 bps but signals pause in tightening

    Peru's central bank raised its monetary policy rate by a further 25 basis points to 4.25 percent but signaled that it will pause in its recent tightening cycle by saying it now expects inflation to gradually return to its target range.
   The Central Reserve Bank of Peru (BCRP), which has now raised its rate by 100 basis points since embarking on a tightening campaign in September last year, said the rise in inflation was affected by temporary supply factors, such as the rise in some food prices and utilities and the deprecation of the sol currency.
    The rate hike was expected following the central bank's guidance last month that it was ready to adjust its policy rate to ensure that inflation would return to its target range of 2.0 percent, plus/minus 1 percentage point.
    Peru's inflation rate rose to 4.61 percent in January from 4.4 percent in December, pushing up inflationary expectations to above the central bank's target range, which can again fuel inflation.
    Excluding food and energy, the monthly inflation rate fell by 0.07 percent to 3.4 percent in January from 3.5 percent and for the full year the central bank forecast inflation of 3.5 percent and 3.0 percent for 2017.
    Peru's sol has been falling since July 2014 and depreciated by 12.2 percent against the U.S. dollar in 2015.
   Today it was trading at 3.5 to the dollar, slightly up from 3.51 earlier today but down from 3.4 at the start of the year. Earlier this week the central bank was reported to have been intervening in support of the sol, buying $60 million dollars of the currency.
    Peru's economy picked up speed in the fourth quarter of last year, the central bank said, adding that the economy this year is expected to grow at a rate that is around its potential output. The central bank has forecast 4.0 percent growth in 2016, up from an estimated 3 percent in 2015.
    In the third quarter of 2015 Peru's Gross Domestic Product grew by 0.5 percent from the second quarter for annual growth of 2.9 percent, down form 3.0 percent in the second quarter but up from 1.7 percent in the first quarter.

Chile holds rate, still monitoring inflation with attention

    Chile's central bank left its monetary policy interest rate unchanged at 3.50 percent and repeated that it is still monitoring "with special attention" the evolution of inflation, which remains above the 4 percent upper limit of its target range.
    The Central Bank of Chile, which raised its rate by 50 basis points last year, added that domestic output and demand continue to show limited growth, confidence indicators remain in pessimistic territory, growth in wages continue to moderate but the unemployment rate fell again.
     The central bank also repeated its phrase from recent months that indicates a tightening bias. It said the future path of its policy rate "considers measured adjustments" to ensure that inflation converges to its target of 3.0 percent, plus/minus 1 percentage point.
    Chile's consumer price inflation rate rose to a higher-than-expected 4.8 percent in January from 4.4 percent in December and core inflation rose to 4.9 percent from 4.7 percent while inflation expectations two years out remain at the bank's midpoint inflation target of 3.0 percent.
    The central bank also repeated its phrase from recent months that the future path of its policy rate "considers measured adjustments" to ensure that inflation converges to its target of 3.0 percent, plus/minus 1 percentage point.
    With Chile's economy suffering from the fall in commodity prices, especially copper, inflation is being fueled by depreciation of the peso.
    The peso has been falling since April 2013 and depreciated by 14.4 percent against the U.S. dollar in 2015. Today the peso was trading around 712.9 to the dollar, down 0.7 percent this year.

Philippines holds rate, inflation still seen in target range

    The central bank of the Philippines left its key rates steady, including the overnight borrowing rate at 4.0 percent, noting that the risks surrounding the outlook for inflation had shifted slightly to the downside but it still expects inflation to settle within its target range in 2016-2017.
    Bangko Sentral ng Pilipinas (BSP), which left rates steady in 2015, added that downward pressures on inflation could come from slower-than-expected global growth and low oil prices while upside risks could come from the El Nino dry weather and pending requests for power rate changes.
    Inflation eased to 1.3 percent in January from 1.5 percent in December, below the BSP's target of 3.0 percent, plus/minus 1 percentage points. The central bank added that inflation expectations remain "firmly anchored" within its target band.

Serbia cuts rate 25 bps on low inflation, China slackening

    Serbia's central bank cut its key policy rate by 25 basis points to 4.25 percent, surprising economists who had expected rates to remain steady, saying that inflationary pressures are expected to remain low due to domestic factors along with weak cost and demand pressures internationally.
    The National Bank of Serbia (NBS), which cut its rate by 350 basis points in 2015, did not issue a specific guidance for its policy stance in the near future in contrast to January's statement when it said  the degree of monetary policy accommodation would hinge on the inflationary impact from international commodity and financial markets.
    Today it said that it would use all available instruments to keep inflation low and stable along with preserving financial stability and a "relatively stable exchange rate" while fiscal consolidation and narrower external imbalances would be "of great assistance" in moderating any external shocks.
    Since January financial markets have been extremely volatile and the NBS said the "increasingly certain" slackening of China's economy could have negative effects on global demand and growth, especially to the extent that it affects the euro area, Serbia's main trading partner.
    "The continuing decline global prices of oil and other primary commodities and the subdued prospects for their growth in the period ahead also works towards easing inflationary pressures," the central bank said, adding that it is even possible that the U.S. Federal Reserve's policy normalization will be "slower than expected earlier."
    The central bank also noted the European Central Bank's easing in December and the "possibility of further accommodation in March."
    Serbia's inflation rate rose to 1.5 percent in December from 1.3 percent in November and the central bank expects it to rise moderately from mid-2016 and return to its target band of late this year or early 2017.
    The central bank targets inflation at a midpoint of 4.0 percent, within a range of 2.5 to 5.5 percent.
    At its meeting today, the central bank's executive board narrowed the corridor of its interest rates to plus/minus 1.75 percentage points from plus/minus 2.0 points relative to its key rate to help stabilize money market rages, reduce the spread between effective rates and the policy rate and thus strengthen the transmission channel of its policy.

Sweden cuts rate 15 bps to shore up confidence in target

    Sweden's central bank cut its benchmark repo rate by a further 15 basis points to minus 0.50 percent and underscored that it "still has a high level of preparedness to make monetary policy even more expansionary, even between the ordinary monetary policy meetings" to ensure "that the trend in inflation approaches the target and that confidence in the inflation target is not weakened."
   Sveriges Riksbank, which 12 months ago set out on the road of negative interest rates, added that its monetary policy had to respond to low inflation and more expansionary monetary policy by other central banks otherwise the exchange rate of the krona "is at risk of strengthening at a faster rate than in the forecast, which would make it harder to push up inflation and stabilize it around 2 percent."
    As in December last year, the Riksbank said it was ready to intervene on foreign exchange markets if the Swedish crown starts to rise so fast that it threatens to push down inflation and today extended the mandate until July for "immediate intervention" without a decision by the entire board.
    In 2015 the Riksbank cut its repo rate by a total of 35 basis points, beginning in February 2015 when it cut it to minus 0.10 percent, and also began purchasing government bonds, initially by 10 billion Swedish crowns, to hold down long-term rates.
     In October last year it raised the total target for purchasing bonds to 65 billion Swedish crowns and while it today left that target steady, it said it would reinvest the "maturities and coupons" from its portfolio of bonds and could extend these purchases further.
    In addition, the Riksbank said it was  also analyzing other options within its operational framework to underpin the lowering of its repo rate.
    But while the Riksbank again lowered its forecast for inflation and the repo rate, it said economic growth was high and unemployment falling, with the forces pushing down inflation having very little to do with domestic conditions.
   "But the downward revision in the inflation forecast increases the risk of weakening confidence in the inflation target and of inflation not rising towards the target as expected," the Riksbank said, adding that it considers the risks of an unchanged policy stance to be greater than the risks of a more expansionary stance, including the risks that households take on even more debt from the rising prices on the housing market.
    The Riksbank lowered its forecast for consumer price inflation to average 0.7 percent this year, down from its December forecast of 1.3 percent, and for 2017 inflation of 2.1 percent, down from 2.5 percent, and for 2018 inflation to average 2.9 percent, down from 3.0 percent.
    Swedish consumer prices rose by 0.1 percent in December last year, the same rate as in the previous four months, with the central bank confirming its estimate for 2015 average inflation of zero.
    The forecast for the repurchase rate, the Riksbank's main policy instrument, was trimmed to minus 0.5 percent this year from the previous forecast of minus 0.4 percent, with the repo rate seen at minus 0.53 percent in the first quarter of 2017 before averaging minus 0.4 percent for the full year, down from the December forecast of minus 0.1 percent.
    For 2018 the repo rate is seen rising to a positive 0.2 percent, below the previous forecast of 0.5 percent.

Wednesday, February 10, 2016

Iceland maintains rate but still sees tighter stance

    Iceland's central bank left its key interest rates steady, but said "a tighter monetary stance will probably be needed in the coming term, in view of growing domestic inflationary pressures," but how much and how quickly rates will be raised will depend on future developments.
    The Central Bank of Iceland (CBI), which raised its rate by 125 basis points in 2015,  said global price developments and a stronger exchange rate of the krona had provided scope to raise rates more slowly than previously considered as it lowered its forecast for inflation and raised the forecast for economic growth.
    In its latest monetary bulletin, the CBI forecast average consumer price inflation of 2.3 percent in 2016, sharply down from 3.3 percent seen in November, and 4.1 percent inflation for 2017, down from 4.0 percent, but an unchanged 3.4 percent inflation rate for 2018.
   Iceland's inflation rate rose to 2.1 percent in January from average 2015 inflation of 1.6 percent as the margin of spare capacity in Iceland's economy was estimated to have disappeared last year and is expected to widen even further.
   "Pay rises well in excess of the inflation target and productivity growth exacerbate inflationary pressure, which are offset by developments in global energy and commodity prices and the exchange rate of the krona," the central bank said.
    Unlike most other currencies worldwide, the Icelandic krona has been appreciating against the U.S. dollar since March 2015 and was trading at 126.8 to the dollar today, up 2.4 percent since the start of this year but only up 0.5 percent since the start of 2015.
    The CBI, which targets inflation of 2.5 percent, said the trend of deflation in global goods markets could come to a halt later this year, which would push up inflation though the extent and timing of changes to global prices was uncertain.
    Economic growth in Iceland last year was estimated at 4.1 percent, weaker than the central bank's forecast of 4.6 percent, but growth this year is forecast to rise slightly to 4.2 percent, sharply up from the November forecast of 3.2 percent, as private consumption is expected to rise, pulling up wages, employment and inflation.
    The CBI forecast a 5.3 percent rise in private consumption this year, up from 4.9 percent in 2015, before easing to growth of 4.2 percent in 2017 and 3.4 percent in 2018.
    The CBI left its key rate, the seven-day deposit rate, unchanged at 5.75 percent and the seven-day lending rate at 6.25 percent.

Sunday, February 7, 2016

This week in monetary policy: Iceland, Armenia, Philippines, Sweden, Serbia, Chile, Peru, Uganda and Zambia

    This week (February 8 through February 13) central banks from 9 countries or jurisdictions are scheduled to decide on monetary policy: Iceland, Armenia, Philippines, Sweden, Serbia, Chile, Peru, Uganda and Zambia.
    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.

FEB 8-FEB 13, 2016:
COUNTRY       DATE           RATE      LATEST        YTD     1 YR AGO    MSCI
ICELAND 10-Feb 6.50% 25 0 5.25%
ARMENIA 10-Feb 8.75% -100 0 10.50%
PHILIPPINES 11-Feb 4.00% 0 0 4.00%       EM
SWEDEN 11-Feb -0.35% 0 0 -0.10%       DM
SERBIA 11-Feb 4.50% 0 0 8.00%       FM
CHILE 11-Feb 3.50% 0 0 3.00%       EM
PERU 11-Feb 4.00% 25 25 3.25%       EM
UGANDA 12-Feb 17.00% 0 0 11.00%
ZAMBIA 12-Feb 15.50% 300 0 12.50%


Friday, February 5, 2016

Emerging markets may be facing tighter liquidity - BIS

    Emerging market economies may be facing tighter liquidity conditions as cross-border lending to emerging economies, especially China, shrank in the third quarter of 2015 and U.S. dollar borrowing by non-bank companies in those economies was flat for the first time since 2009, according to the Bank for International Settlements (BIS).
    BIS General Manager Jaime Caruana said global liquidity - a term that captures the ease of financing in global financial markets -  shows that the stock of U.S. dollar-denominated debt of non-bank borrowers outside the U.S. was unchanged at $9.8 trillion from June to September and dollar borrowing by non-banks in emerging economies also was steady at $3.3 trillion.
    An even clearer sign that global liquidity conditions for emerging markets may have peaked comes from a decline in cross-border lending to China, Brazil, India, Russia and South Africa. In the third quarter of last year lending shrank by $38 billion to $824 billion from the second quarter, Caruana said in a speech at the London School of Economics (LSE).
    The shift in global financing conditions comes as growth in emerging market economies is declining, the U.S. dollar is rising against emerging market currencies, and commodity prices, especially oil, has plunged, hitting commodity producers.
    While these three headwinds may appear unconnected at first sight, Caruana said they are deeply connected and share common factors.
    "Rather than being exogenous "shocks," they are manifestations of a major realignment of economic and financial forces associated with the long-anticipated shift of global monetary forces," he said.
    Although total global debt has continued to rise since the global financial crises, the growth in emerging markets has been dramatic as compared to that of advanced economies, Caruana said.
    Since 2009 the average level of private credit in emerging economies as a proportion of Gross Domestic Product has jumped to 125 percent from around 75 percent and the debt of non-financial emerging market firms as a proportion of GDP has grown so fast that it exceeds that of advanced economies.
    Companies that produce commodities as well as non-tradable goods were attracted to a relatively weak U.S. dollar and low interest rates since 2009 and as a rule of thumb, 1 percent depreciation of the dollar has been associated with a 0.6 percentage point increase in the quarterly growth of dollar-denominated cross-border lending outside the U.S. 
    The increased leverage facing companies in emerging markets would be less of a concern if the debt had been used to finance productive investments that eventually boost profits.
    "However, the profitability of EME non-financial companies has fallen," Caruana said, noting that traditionally they had been more profitable than their peers in advanced economies but their profitability has been falling in recent years and is now below that of advanced economies.
    Although many firms in emerging markets have dollar cash flows to help service debt and much of the debt has maturities of over 10 years, Caruana said the challenges of deleveraging and a depreciation of the local currency should not be underestimated.
    "The feedback loop has started to impact the broader economy in EMEs now that the dollar has started to appreciated, " he said.
    And while many emerging markets economies now have large foreign exchange reserves in contrast to the crises in the 1980s and 1990s, Caruana said this may not necessarily prevent slower growth as there is no real mechanism for transferring foreign exchange reserves to private firms with dollar debts, which end up curtailing their operations as they reduce leverage.
    The impact of the fall in commodity prices has not only hit oil producers in emerging economies but also U.S. shale producers, with both types of firms borrowing heavily from both banks and markets against oil reserves and projected revenue.
    The value of outstanding bonds from oil and gas companies rocketed to $1.4 trillion in 2014 from $455 billion in 2006 and syndicated loans amounted to $1.6 trillion in 2014, up from $600 billion in 2006.
    A large part of the borrowing was from state-owned oil companies in emerging markets whose firms paid large dividends to their governments, helping finance spending.
    "As with any leveraged sector, the combination of falling oil prices and higher leverage can lead to financial strains for oil-related firms," Caruana said.

    Click to read Caruana's speech "Credit, commodities and currencies."


Romania maintains rate, inflation in target band 2017

    Romania's central bank left its monetary policy rate steady at 1.75 percent as the latest quarterly inflation forecast sees inflation re-entering the variation band around the target at the start of 2017 and remaining there after slipping deeper into negative territory from January through May this year due to the cut in Value Added Taxes in June 2015.
    The National Bank of Romania (NBR), which cut its rate by 350 basis points and the reserve requirement on foreign exchange liabilities in January, added that inflation is expected to remain within the target variation band of 1.5 to 3.5 percent from 2017 due to a fading of the impact of the VAT rate cuts, an easing of the fiscal policy stance and the rise in wage costs.
    Romania has cut its VAT rate in two steps, initially in June 2015 and then to 20 percent from 24 percent as of Jan. 1, 2016, and the February inflation report will be published on Feb. 9.
    In December Romania's headline inflation rate was minus 0.9 percent, higher than minus 1.1 percent in November and the highest since consumer prices started falling in June. The gradual rise in inflation in recent months was attributed to the base effects from fuel price movements, a faster pick-up in tobacco prices and the relative weakening of the leu currency.
    In its November inflation report, the central bank forecast that headline inflation would hit minus 0.7 percent at the end of 2015 and then turn positive by the end of this year at 1.1 percent before returning to the variation band.
    Excluding the impact of the reduced VAT rate, the NBR said annual inflation would have neared 2 percent at the end of 2015, within its variation band around the midpoint target of 2.5 percent. In November the central bank had forecast headline inflation of 2.1 percent end-2015 and 2.7 percent end-2016.

Thursday, February 4, 2016

Mexico holds rate but risks rising, watching peso

    Mexico's central bank left its benchmark target for the overnight interest rate steady at 3.25 percent as inflation is expected to converge to the bank's target but warned that the economic situation had changed in an unfavorable manner and risks had risen so it was closely monitoring inflationary expectations, especially the exchange rate and how it affects consumer prices.
    The Bank of Mexico, which in December raised its rate by 25 basis points in the wake of the U.S. Federal Reserve's hike, added that it was especially watching the relative position between the U.S. and Mexico in order to take flexible measures when conditions warrant.
    The central bank noted that the the balance of risks to global growth and inflation had worsened since December as the global economy was continuing to weaken and one could not rule out that emerging economies with greater vulnerabilities could "face a messy financial adjustment process."
    This also meant that Mexico's peso had depreciated against the U.S. dollar after the Federal Reserve maintained its rate in January and looking ahead it cannot be "ruled out that international financial volatility will remain high or even increase," the central bank said.
    The peso was trading at 18.28 to the U.S. dollar today, down from 17.2 at the start of this year with the central bank on Tuesday saying that it had twice sold $200 million at two auctions after the peso fell more than 1 percent from its fix in the previous session and then fell another 1.5 percent.
    Mexico's economy was still showing sustained growth in the fourth quarter of last year, helped by higher wages, but the bank said manufacturing exports were stagnant and it growth in output in the fourth quarter was moderately lower than in the third quarter.
    Mexico's Gross Domestic Product expanded by an annual 2.5 percent in the fourth quarter, slightly below 2.6 percent in the third quarter.
    Mexico's inflation rate eased in December to a 2015-low of 2.13 percent, down from November's 2.21 percent but data for the first half of January show a rise to 2.48 percent due to the comparison of the cut in the cost of telephone services in January 2015.
    The central bank expects that both headline and core inflation will end this year close to 3.0 percent and then stabilize around that level in 2017.
    The central bank targets 3.0 percent inflation, plus/minus 1 percentage point.


Czechs to use FX tool until H1 2017, mull negative rates

    The central bank of the Czech Republic left its benchmark two-week repo rate steady at 0.05 percent but firmed up its commitment about using currency markets as tool of monetary policy, saying it "will not discontinue the use of the exchange rate as a monetary policy instrument before 2017" and considers "it likely that the commitment will be discontinued in the first half of next year.
   The Czech National Bank (CNB) has been keeping a cap on the exchange rate of its koruna currency as a tool to ease monetary conditions since November 2013 but in December it said it was likely to stop using the exchange rate as a tool around the end of 2016.
   In addition to extending its commitment to keep down the koruna, the CNB said its board had "again also discussed the possibility of introducing negative interest rates in light of the widening of the interest rate differential vis-a-vis the euro area and developments in domestic financial markets."
    In its new economic forecast, the CNB lowered its predictions for inflation due to the fall in inflation at then end of 2015, a subdued outlook for foreign producer prices and the drop in oil.
    The CNB forecast in November that Brent oil would average US$54.5 per barrel in 2016 but now forecasts $35.9. For 2017 the forecast for oil was cut to $42.8 from $58.7.
    Consumer prices are now seen rising by 2.0 percent in the first quarter of 2017 and 2.1 percent in the second quarter of 2017, below the previous forecast of 2.2 percent and 2.2 percent, respectively.
    Inflation in December was steady from November at 0.1 percent.
    Economic growth in 2015 was still seen at 4.7 percent but then dropping to 2.7 percent this year, down from the previous forecast of 2.8 percent, before rising to 3.0 percent in 2017, above the past forecast of 2.9 percent.
    In the third quarter of last year the economy of the Czech Republic grew by an annual 4.7 percent, up from 4.6 percent in the second quarter and 4.1 percent in the first quarter.