Thursday, June 21, 2018

Mexico hikes rate 25 bps, peso worsens inflation outlook

      Mexico's central bank raised its benchmark interest rate by a further 25 basis points to 7.75 percent, as expected, as a fall in the peso's exchange rate in the last two months has worsened the outlook for inflation.
      The Bank of Mexico (Banxico) has now raised its rate 13 times and by a total of 475 basis points since December 2015 when the U.S. Federal Reserve started tightening its policy, putting downward pressure on the peso's exchange rate which then raises import prices and inflation.
       After raising the rate in February, its first and only rate hike this year, Banxico held fire in April and May as inflation decelerated and fell to a 2018 low of 4.51 percent in May while inflation expectation for this year also eased.
       "Nevertheless, some of the upside risks to inflation identified by the Central Bank have started to materialize," the central bank said, pointing to the depreciation of the peso along with rising prices of gasoline and LP gas.
       The balance of risks to inflation have thus deteriorated and could delay the decline in inflation toward the central bank's target of 3.0 percent.
       "Looking ahead, the Governing Board will maintain a prudent monetary policy stance and will continue to follow closely the potential pass-through of exchange rate fluctuations to prices, the monetary policy stance relative to that of the U.S., and the conditions of slack in the Mexican economy," Banxico said.
      In response to the rate hike, the peso rose against the U.S. dollar and was trading at 20.24 to the dollar, down 2.8 percent this year. Compared with the start of 2016, the peso has lost 14 percent.
      In sync with most currencies, the peso has come under pressure from the stronger U.S. dollar, propelled by the Fed's two rate hikes this year, and a more hawkish stance adopted last week.
     Uncertainty over NAFTA negotiations, U.S. tariffs on steel and aluminum and Mexico's general election in July has also contributed to peso weakness.
      Mexico's economy has slowed since early 2017 but Banxico said it was in a better position now to cope with adverse scenarios and it gained strength in the first quarter.
      But overall, the central bank still thinks the balance of risks to growth remain to the downside.
      Mexico's economy grew by 1.1 percent in the first quarter of this year from the fourth quarter but on an annual basis growth eased to 1.3 percent from 1.5 percent.

UK's BOE maintains rate but MPC votes 3-6 for hike

      The U.K. central bank left its benchmark Bank Rate at 0.50 percent but 3 members of its 9-member monetary policy committee (MPC) voted to raise the rate immediately as they were highly confident the economic slowdown in the first quarter was temporary and a modest tightening now would help avoid a rise in inflation that would then lead to higher rate hikes that end up triggering sharp falls in growth and employment.
      At the previous MPC meeting in May only two external members - Ian McCafferty and Michael Saunders - had voted to raise the Bank Rate by 25 basis points but they have now been joined by Andrew Haldane, chief economist of the Bank of England (BOE).
       In the run-up to the May meeting, early expectations the BOE would raise its rate for the second time since November 2017 were dashed after it became clear the economy had slowed sharply in the first quarter.
      Investors questioned whether the BOE was correct in considering this slowdown as temporary and began wondering whether it would have to postpone any rate hikes to 2019.
       Slower than expected growth in the euro area, a soft patch in China and a reversal of capital flows to some emerging markets amidst robust U.S. growth reinforced investors' nervousness and this accelerated the fall in the pound's exchange rate along with a broad rise in the U.S. dollar.
       Today the BOE answered many of these questions, saying recent data confirmed that "the slowdown in Q1 had been temporary," and the collective judgement of the MPC remains that "an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target..."
       News since the May meeting had given the majority of the MPC "greater reassurance that the softness of activity in the first quarter had been largely temporary," as household consumption and sentiment had "bounced back strongly from what appeared to be erratic weakness in Q1, partly related to the adverse weather."
       The reaction of currency markets to the BOE's decision was immediate, with the pound jumping 1.5 percent to 1.31 per U.S. dollar. The pound is now up 3 percent since the start of this year.
       After slumping to quarterly growth of only 0.1 percent in the first quarter, the BOE said its staff expected second quarter Gross Domestic Product growth of 0.4 percent, in line with its May estimate,  and growth in unit wage costs had appeared to pick up.
       Headline inflation and core inflation was steady in May and April at 2.4 percent and 2.1 percent, respectively, both 0.1 points higher than expected in May, with the fall in the pound tending to push up inflation further ahead.
       Although growth in the U.K. is modest by historical standards and forecast to average around 1.75 percent in the next few years, it is still above the diminished rate of supply, resulting in a small margin of excess demand by early 2020. This feeds into higher wages and costs.
        In addition to deciding on the Bank Rate, the MPC also looked at its stock of assets that it has purchased in recent years - a policy known as quantitative easing - in order to hold down long-term interest rates and stimulate the economy when policy and short term rates are already very low.
       Under a policy from 2015, the BOE had planned to not reduce its stock of 435 billion of U.K. government bonds and 10 billion of corporate bonds until the Bank Rate reached around 2.0 percent.
       But reflecting the rate cut in August 2016, in the wake of the U.K.'s Brexit vote, the effective lower bound of the Bank Rate has fallen and the BOE may now decide to reduce its stock of assets at a gradual and predictable pace once the Bank Rate has reached around 1.5 percent.

Norway maintains rate but likely to hike in September

      Norway's central bank left its key policy rate at 0.50 percent but said the economic upturn is continuing and the "current assessment of the outlook and balance of risks suggest that the key policy rate will most likely be raised in September 2018."
      Norges Bank (NB) had already flagged that it would raise its rate in the second half of this year but has now pinpointed this could happen on Sept. 18 when its board meets to discuss another update of its economic forecasts. The board also meets on Aug. 15.
      "Monetary policy is expansionary. The outlook for the Norwegian economy suggest that it will soon be appropriate to raise the key policy rate," NB Governor Oyestein Olsen said.
       In its March monetary policy report NB began preparing the ground for tighter monetary policy by raising its forecast for the policy rate this year to an average of 0.6 percent from 0.5 percent.
       NB has kept its rate steady since cutting it in March 2016 as it wrapped up an easing cycle of more than four years. It has not raised its key rate since May 2011.
       In today's update of the policy report, NB confirmed it still expects the rate to average 0.6 percent this year and then 1.1 percent in 2019, implying two rate hikes of 25 basis points each next year.
       For 2020 the NB also forecasts two rate hikes with the rate averaging 1.6 percent, up from 1.5 percent forecast in March. In 2021 the rate is seen averaging 2.0 percent.
      "Uncertainty surrounding the effects of a higher interest rate suggests a cautious approach," NB said, adding the balance of risks imply gradual rate rises in the years ahead.
       But while NB sees continued expansion in Norway's economy that leads to higher wages and strong demand, it is less upbeat about the prospects for global growth that could prove to be weaker than assumed due to rising protectionism and political uncertainty.
      "There is uncertainty surrounding global economic developments," NB said in its monetary policy report. While trade policy measures so far are assumed to have limited impact on growth, NB  warned "increased protectionism may dampen global growth to a further extent than projected."
       After several years of weak growth, Norway's economy picked up speed last year and is expected to strengthen further this year on higher oil production and solid growth among its trading partners. This is pushing up capacity utilization to above normal levels and wage growth.
       NB maintained its 2018 forecast for growth of Norway's mainland economy, which excludes the offshore oil and gas industry, of 2.6 percent but raised it to 2.3 percent in 2019, up from 2.0 percent, but lowered it slightly to 1.6 percent in 2020 and 1.3 percent in 2021.
      Inflation has also accelerated in recent months from higher energy prices and taxes and hit 2.3 percent in May, down from 2.4 percent in April, but up from 2.2 percent in February and March.
      Underlying or core inflation, which excludes energy and taxes, was only 1.2 percent in May but is still expected to rise gradually from higher wages.
       NB raised its forecast for headline inflation this year to 2.3 percent from 2.1 percent but trimmed the 2019 forecast to 1.6 percent, the 2020 forecast to 1.6 percent and the 2021 forecasts to 1.9 percent.
      Core inflation is seen averaging 1.3 percent this year, then 1.5 percent in 2019, 1.6 percent in 2020 and 1.9 percent in 2021.
      Norway's krone has on average been slightly weaker than NB had projected in March but is still projected to appreciate in coming years due to a gradual widening of the interest rate differential against its trading partners.
      The krone was trading at 8.15 to the U.S. dollar today, up 0.6 percent this year.

Wednesday, June 20, 2018

Philippines raises rate for 2nd month, stresses vigilance

      The Philippine central bank raised its monetary policy rates for the second month in a row, saying it is ready to take further action if needed and emphasized its "continued vigilance against developments, including excessive peso volatility, that could affect the outlook for inflation."
      Bangko Sentral ng Pilipinas (BSP) said it "is prepared to take further policy action as needed to achieve its price and financial stability objectives."
      BSP raised its benchmark overnight reverse repurchase (RRP) by another 25 basis points to 3.50 percent, along with its overnight lending and deposit rates, a move that was expected by most analysts.
      The benchmark rate has now been raised 50 basis points following the hike in May, which was the first rate hike by BSP since September 2014.
      Today's rate hike follows a rise in inflation in May to 4.6 percent, the fifth month of accelerating inflation and the third month inflation has been over the central bank's target range of 2 -4 percent around a 3.0 percent midpoint.
      Explaining the reason for its second consecutive rate increase, BSP said inflation expectations for this year remained elevated and this posed a risk of further prices increases.
      And while 2019 inflation expectations remain within the target range, BSP said elevated expectations for this year posed a risk of sustained price pressure from future wage and prices.
      Rising oil and commodity prices is also expected to have a stronger effect on inflation given robust demand in the Philippines, underlying that upside risks dominate the inflation outlook.
      Last week's hawkish stance by the U.S. Federal Reserve has also put further pressure on the exchange rate of the peso, which the raises import prices and adds to inflationary pressure.
      The peso has been weakening all year and was trading at 53.46 to the U.S. dollar today, down 6.5 percent since the start of this year.

Tuesday, June 19, 2018

Morocco maintains rate on moderate underlying inflation

      Morocco's central bank continued to keep its monetary policy rate at 2.25 percent, unchanged since March 2016, saying underlying inflation remains moderate despite the recent rise in headline inflation which is based on changes to the consumer price index along with higher prices of volatile food products and tariffs on regulated prices.
       Underlying inflation is forecast to average 1.1 percent this year and 1.6 percent in 2019, the Bank of Morocco, or Bank Al-Maghrib (BAM), said. This forecast is down from March when BAM forecast 2018 underlying inflation of 1.4 percent and 1.9 percent in 2019.
      Morocco's headline inflation rate rose to 2.7 percent in May from 2.5 percent in April and BAM expects inflation to average 2.4 percent this year and then ease to 1.4 percent in 2019.
      The forecast for 2018 headline inflation is sharply up from the previous forecast in March of 1.8 percent while the 2019 forecast is largely similar to the previous 1.5 percent forecast.
      After slowing in 2016, Morocco's economy recovered last year and is forecast to continue to expand this year on good agricultural production and improved non-agricultural activities.
      Last year Morocco's economy grew by 4.1 percent, up from 1.1 percent in 2016, and BAM forecast 3.6 percent growth this year and 3.1 percent in 2019.
      In March BAM raised its 2018 growth forecast to 3.3 percent from 3.0 percent but lowered its 2019 forecast to 3.5 percent from 3.6 percent.
      Exports from Morocco are expected to continue to rise this year, with exports and the automotive industry getting a boost next year from start of production at the Peugeot Citroen plant near Rabat which is planned to produce 100,000 cars next year before total output of 200,000 vehicles and 200,000 engines at its final stage.
     BAM forecast goods export to rise 5.8 percent this year and 6.9 percent in 2019, with tourism revenue up 8 percent this year and 4 percent in 2019.
      The current account deficit is seen easing to 3.6 percent of GDP in 20189 from 4.1 percent this year while foreign exchange reserves are seen ending this year at 255.4 billion dirhams and 245.9 billion by end-2019, enough for more than 5 months of imports.
      In January last year Morocco introduced a more flexible exchange rate system by widening the dirham's fluctuation band against hard currencies to 2.5 percent on either side from 0.3 percent for a total range of 5.0 percent.
      The dirham is mainly pegged to the euro but last year BAM reduced the euro weight to 60 percent from 80 percent and raised the U.S. dollar weighting to 40 percent from 20 percent.
      Today the dirham was trading at 9.54 to the U.S. dollar, down 2 percent this year, and at 11.06 to the euro, up 1.4 percent this year.

Botswana keeps rate steady on positive inflation outlook

      Botswana's central bank again left its Bank Rate at 5.0 percent, citing a positive outlook for price stability and economic activity that is expected to strengthen but still remain below capacity.
      The Bank of Botswana (BB) has kept its rate steady since cutting it to the current level in October 2017.
      Botswana's inflation rate eased to 3.3 percent in May from 3.4 percent in April and is forecast to remain within the bank's target range of 3 - 6 percent in the medium term based on subdued domestic demand and a modest increase in foreign prices.
      Risks on the upside arise from higher administered prices, government levies or taxes, along with higher-than-expected commodity prices. Downside risks stem from restrained global economic activity, technological progress and productivity improvements, BB said.
      Botswana's economy slowed last year due to declines in copper and nickel production, and lower activity in construction and trade. But the fiscal and external accounts were nearly balanced, the exchange rate was stable and public debt was low and about 19 percent of Gross Domestic Product, according to the International Monetary Fund (IMF) on June 8.
      Botswana's GDP slowed to 2.4 percent growth in 2017 from 2016's 4.3 percent as mining output shrank by 11.2 percent from a decline of 3.5 percent in 2016 while non-mining activity rose by 4.2 percent, down from 5.5 percent growth in 2016.
      But growth in 2018 is expected to pick up from 2017, both BB and the IMF said, supported by a recovery of mining activity, including higher diamond sales, stable supply of water and electricity, and higher government spending.
      In synch with the rise in the U.S. dollar, Botswana's pula has been depreciating in recent months and was trading at 10.45 to the dollar today, down. 5.5 percent this year.

Monday, June 18, 2018

Mongolia maintains rate after first meeting of new MPC

       Mongolia's central bank kept its policy rate at 10.0 percent, saying the outlook for inflation is stable around the target level of 8 percent and economic growth is expected to pick up further.
       The decision to maintain the rate comes after the Bank of Mongolia (BOM) slashed its key rate by 500 basis points since December 2016, including a 100 point cut in March when it also said it expected inflation to stabilize around its target level.
       Despite the rising price of global oil prices, BOM said prices of some of its export commodities had been improving and this lead to a relatively stable outlook for the terms of trade.
       The decision by BOM's monetary policy committee (MPC) comes after Mongolia's parliament approved a new central bank law that named the MPC as the official body that takes monetary policy decisions in a collective framework.
       Decisions will now be made after meetings held in two phases, and the first meeting of the new committee took place on June 11, followed by a second meeting on June 15 in which economic conditions, the economic outlook and risks, and the monetary policy stance was discussed.
       In its statement issued June 18, the central bank said the MPC set a ceiling on debt to income ratio for personal consumption credit issued by banks at 70 percent to prevent an accumulation of risk in the financial sector from a rapid acceleration of consumer credit and household debt.
       The new 7-member committee includes four members that are appointed by the parliament for six-year terms. Previously, all members of the MPC were appointed by the governor of  BOM.
       The other three members of the MPC include the central bank's governor, the first deputy governor and the deputy governor of the BOM.
       Mongolia's inflation rate rose slightly to 6.1 percent in May from 6.0 percent in April while economic activity has been accelerating in the first quarter as mining investments are continuing to expand and investor and consumer confidence has recovered.
       Surges of imports, however, in tandem with higher exports may pose a downside risk to the balance of payments, BOM said.
       Mongolia's economy was hit hard in 2016 when foreign investment collapsed following a fall in the prices of its major exports such as coal and copper.
       In May 2017 the IMF and Mongolia agreed on a 3-year, $425 million loan as part of a total financing package worth $5.5 billion that was supported by Japan, Korea, the World Bank and the Asian Development Bank, the fourth-largest aid package in IMF history.
      Since then commodity prices have been rising, with Mongolia's coal exports to China up as China has been closing its mines and banned the import of coal from North Korea.
       Last month the IMF reached staff-level agreement on the fourth review of Mongolia's extended fund facility, releasing another US$434.3 million.
       "Macro-economic performance under the program remains positive, with all quantitative targets met," the IMF said, adding fiscal results in the first quarter were much better than expected as revenues rose 21 percent and net international reserves rose by $200 million.
       The exchange rate of the tugrik, which tumbled in the second half of 2016, has been relatively stable since September last year and was trading at 2,421 to the U.S. dollar today, unchanged from 2,422 at the start of this year.


Mozambique cuts rate 7th time on single-digit inflation

      Mozambique's central bank cut its monetary policy rate for the seventh time in a row as forecast that show inflation will remain in single digits justify continuing the easing that began in April 2017.
      The Bank of Mozambique (BM) cut its MIMO (monetary policy rate) by another 75 basis points to 15.75 percent and has now cut the rate by 600 basis points since April last year when MIMO replaced the standing facility rate as the new signal rate and set it at 21.75 percent.
      This year BM has cut its policy rate three times by a total of 375 basis points.
      BM also lowered the standing deposit facility (SDF) rate by 50 basis points to 12.0 percent but maintained the standing lending facility (SLF) rate at 18.0 percent along with the reserve requirement for domestic currency liabilities at 14 percent and for foreign currency liabilities at 22 percent.
      As in recent months, the central bank said it would continue to monitor economic and financial indicators as well as risk factors and "may take the necessary corrective measures before the next meeting" of its monetary policy committee.
       While economic conditions continue to favor low and stable inflation, the central bank said monetary policy will continue to be prudent in light of risks from the stability of public debt along with the evolution of regulated prices. BM also noted external risks from recent trade tensions between major economies, a volatile U.S. dollar and commodity prices, especially oil.
      Mozambique's inflation rate rose to 3.26 percent in May from 2.33 percent in April but was down from 20.45 percent in May 2017 due to higher transport and liquid fuel prices.
      Excluding administered prices, inflation in May was 1.03 percent.
      Economic growth in Mozambique remains moderate, BM said, saying Gross Domestic Product grew an annual 3.2 percent in the first quarter of this year, down from 4.5 percent in the same 2017 period and down from 3.7 percent in the fourth quarter of last year.
      But in contrast to the first quarter of last year, where several sectors slowed, all sectors saw positive changes this year apart from electricity and water, which shrank by 1.8 percent.
      In April the economic climate index improved, reflecting optimism by entrepreneurs, especially those in the transport and trade sectors, BM said.
      Banks' lending rates have shown "a timid reaction" to BM's rate cuts and credit to the private sector remains stagnant at a time of a continuous rise in internal public debt, BM said, noting the public deficit worsened in the first quarter, putting pressure on domestic financing.
      Improved external demand is supporting Mozambique's exports, with the trade deficit down by US$113 million in the first quarter of this year from the same 2017 period due to an increase in exports of US$194 million while imports rose $82 million.
       The current account deficit, however, rose by $153 million to $964 million, mainly reflecting the payment of services by large foreign direct investment projects.
       Despite the global trend of a stronger U.S. dollar, Mozambique's metical - which 38 years on June 16 ago replaced Portugal's escudo - has appreciated since early March and is now at levels similar to the start of this year.
       The metical was trading at 59.2 to the dollar today compared with 58.9 at the start of this year and up 5.9 percent since a 2018 low of 62.7 on March 9.
      Mozambique's international reserves declined slightly to $3.235 billion, enough for 7 months of imports, from $3.260 billion at the end of the first quarter.

Sunday, June 17, 2018

This week in monetary policy: Mozambique, Botswana, Hungary, Morocco, Thailand, Brazil, Switzerland, Norway, Taiwan, Philippines, UK, Mexico, Paraguay & Mongolia

    This week - June 17 through June 23 - central banks from 14 countries or jurisdictions are scheduled to decide on monetary policy: Mozambique, Botswana, Hungary, Morocco, Thailand, Brazil, Switzerland, Norway, Taiwan, Philippines, United Kingdom, Mexico, Paraguay and Mongolia.
    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.

JUNE 17 - JUN 23, 2018:
COUNTRY                   DATE                     RATE                LATEST                    YTD              1 YR AGO
UNITED KINGDOM21-Jun0.50%000.25%

Friday, June 15, 2018

Russia keeps tight conditions, slows shift to neutral

     Russia's central bank left its key monetary policy rate at 7.25 percent and said the planned shift toward a neutral policy stance needs to be slower and tighter monetary conditions would help limit any impact on inflation from tax increases and a slight rise in inflation expectations.
     The Bank of Russia, which also maintained its rate in April after two cuts earlier this year, raised its inflation forecast slightly and now expects inflation of 3.5-4.0 percent in late 2018 and then rise for a short period to 4.-4.5 percent in 2019 before returning to the 4.0 percent target in early 2020.
      This forecast compares with the bank's earlier forecast of 3-4 percent inflation late this year and then around 4.0 percent in 2019.
      "In the future, the Bank of Russia will explore the necessity of key rate changes by assessing inflation risks, inflation dynamics and economic developments against the forecast," the bank said, striking a more neutral tone in its guidance.
      A neutral monetary policy rate had been estimated to be between 6 and 7 percent but in April the central bank said this had shifted toward the upper bound of this range in light of a rise in Russia's risk premium and higher interest rates in advanced economies.
      While Russia's inflation rate is currently low, the central bank is looking ahead to the impact of the government's planned increase of Value Added Tax (VAT) to 20 percent from 18 percent and the fall in the ruble's exchange rate in April following new U.S. sanctions.
      "The balance of risks up to the end of 2019 has shifted towards pro inflationary risks," from higher taxes and the impact of higher interest rates in advanced economies that may affect the exchange rate and thus inflation.
      Russia's inflation rate has been steady at 2.4 percent from March through May as higher oil prices was offset by a substantial decline in fruit and vegetable prices.
      Higher oil prices along with a fall in the ruble's exchange rate in early April had led to a slight increase in inflation expectations and the planned tax changes would add about 1 percentage point to inflation, with some of the impact this year.
      While economic growth in the first quarter was slightly below the bank's forecast, the central bank said there was a rebound in April, confirming that the slowdown in March was temporary.
      The central bank retained its forecast for economic growth this year of 1.5 - 2.0 percent and in 2019 and 2020 growth should remain close to the same level. Russia's economy grew by an annual rate of 1.3 percent in the first quarter of this year, up from 0.9 percent in the previous quarter.
      In early April the U.S. launched new sanctions against Russia that led to a fall in stocks and a 10 percent fall in the ruble's exchange rate.
      The ruble has yet to recover this loss and was trading at 62.5 to the dollar today, largely unchanged since early April, and down 7.7 percent since the start of this year.

Thursday, June 14, 2018

Azerbaijan cuts rate another 100 bps on low inflation

      Azerbaijan's central bank lowered its benchmark refinancing rate for the third time in a row, saying inflation will remain in single digits and within the bank's target range by the end of this year while economic growth is forecast to continue to the end of 2018.
       The Central Bank of Azerbaijan (CBA) cut its rate by 100 basis points to 10.0 percent and has now cut its rate by a total of 500 basis points this year as it continues to unwind four large rate hikes in 2016.
      Between February and September 2016, the CBA raised its rate by a total of 12 percentage points to bolster confidence in the manat currency and curb inflation after the plunge in global crude oil prices undermined investor's confidence.
       Azerbaijan's inflation rate has declined sharply this year and averaged 3.2 percent in the first five months of this year due to a strengthening the effective exchange rate of the manat, management of money supply and a reduction in inflation expectations, CBA said.
      In addition, seasonal factors have also supported the decline in inflation and surveys show that inflation expectations by households and businesses have fallen to a minimum.
      The main risks to the inflation outlook stems from higher domestic production costs, fiscal expansion and aggregate demand, inflation expectations and an asymetric sensitivity to the exchange rate.
      Azerbaijan's economy has recovered this year after two years of recession, with growth in the January-May period of 1.9 percent, CBA said.
       Oil and gas account for roughly 95 percent of the country's exports and higher foreign demand and public investment are helping boost the non-oil sector.
       Azerbaijan's balance of payments is also improving, with a current account surplus of 15.4 percent of Gross Domestic Product in the first quarter of the year. In the first five months of the year exports were up by 65.8 percent and non-oil exports up by 14.2 percent, CBA said.
       Earlier the CBA reported that currency reserves had risen by an annual 13.4 percent to the end of May to US$5.471.4 billion.