Monday, September 18, 2017

Azerbaijan holds rate, expects no change to stance

     Azerbaijan's central bank kept its benchmark refinancing rate at 15.0 percent and said an analysis of short and medium-term risks to inflation implied there was no need for any significant correction to its monetary policy.
      The Central Bank of the Republic of Azerbaijan (CBA), which has maintained its rate since raising it in September 2016, also said the current account showed a surplus of 2.5 percent of Gross Domestic Product in the first half of this year due to higher oil prices and this was helping maintain a balance in the foreign exchange market.
      The economy of Azerbaijan, which relies on oil and gas for 95 percent of its exports and 75 percent of government revenue, was hit hard by the fall of crude oil prices in 2014 and its currency, the manat, came under heavy pressure as residents switched into U.S. dollars.
      Initially the CBA abandoned the manat's peg to the dollar in favor of a dollar-euro basket and then in early 2015 it devalued the manat by one-third.  In December 2015 the CBA then shifted to a flexible exchange rate regime and since then the manat has been more stable.
      Today the manat was trading around 1.69 to the U.S. dollar,  up 6.5 percent this year, and the central bank said the decline of the dollar this year was helping reduce inflation expectations and the stable exchange rate is helping further reduce the economy's dollarization, with the current level of interest rates also helping stimulate savings.
     Azerbaijan's inflation rate was steady at 14.0 percent in August from July and there were no significant changes to inflation expectations, with various products and prices still sensitive to changes in government-regulated prices, the CBA said.
     Helped by a trade surplus of US$1.9 billion in the January-August period, Azerbaijan's strategic currency reserves rose by 11.5 percent, the CBA said, adding its expects the balance of payments to remain in a surplus by the end of the year.
      In the country's non-oil sector, economic output was up 2.2 percent in the first 8 months of the year, with tourism up 2.6 percent, non-oil industry up 4.6 percent, trade up 1.8 percent, and communications and information up 4.9 percent.
      The CBA is currently using a flexible exchange rate regime but plans to adopt a floating exchange rage regime along with an inflation targeting regime, with the monetary base a reliable guide to its monetary policy stance.


Sunday, September 17, 2017

This week in monetary policy: Azerbaijan, Kenya, Hungary, Mongolia, USA, Japan, Philippines, Norway, South Africa, Paraguay, Indonesia and Ghana

    This week (September 17 through September 23) central banks from 12 countries or jurisdictions are scheduled to decide on monetary policy: Azerbaijan, Kenya, Hungary, Mongolia, United States, Japan, Philippines, Norway, South Africa, Paraguay, Indonesia and Ghana.
    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.

SEP 17 - SEP 23, 2017:
COUNTRY                 DATE                RATE           LATEST                 YTD               1 YR AGO       MSCI
AZERBAIJAN 18-Sep 15.00% 0 0 15.00%
KENYA 18-Sep 10.00% 0 0 10.00%          FM
HUNGARY  19-Sep 0.90% 0 0 0.90%          EM
MONGOLIA 20-Sep 12.00% -200 -200 15.00%
UNITED STATES 20-Sep 1.25% 0 50 0.50%          DM
JAPAN 21-Sep -0.10% 0 0 -0.10%          DM
PHILIPPINES 21-Sep 3.00% 0 0 3.00%          EM
NORWAY 21-Sep 0.50% 0 0 0.50%          DM
SOUTH AFRICA 21-Sep 6.75% -25 -25 7.00%          EM
PARAGUAY 21-Sep 5.25% -25 -25 5.50%
INDONESIA 22-Sep 4.50% -25 -25 5.00%          EM
GHANA 22-Sep 21.00% -150 -450 26.00%          FM

Global credit markets continue to boom with risk on - BIS

       Subdued volatility in financial markets, low inflation and a simultaneous expansion in advanced and emerging market economies that has not been seen for a long time continues to boost international bank credit and thus debt, raising the question of how vulnerable balance sheets may be to higher interest rates, according to the Bank for International Settlements (BIS).
      By the end of March the stock of international bank claims rose another 1.7 percent year-on-year to a total of $32 trillion with U.S. dollar credit to the non-financial sector outside the U.S. rising further to $8.2 trillion, BIS said in its September quarterly review.
     "The low financial market volatility was remarkable," said Claudio Borio, head of BIS' monetary and economic department, about the so-called "Goldilocks" scenario in which low inflation and global growth continues to boost the "risk-on" phase in financial markets.
      Concern over a simultaneous tightening of monetary policy in major economies in the first quarter of the year faded in the second quarter as bond yields retreated, stock markets rose and the U.S. dollar fell, whetting investors appetite for emerging market assets.
       Propelled by the issuance of debt securities by borrowers from emerging markets, U.S. dollar credit to borrowers from emerging markets rose further to $3.4 trillion at the end of the first quarter, with the bulk of the increase by residents of Africa and the Middle East, especially through bond issues by governments in oil-exporting countries.
      The decline in the U.S. dollar has also led to widespread use of carry trades, with large net short positions in funding currencies, such as the yen and Swiss franc, and large net long positions in EME currencies and the Australian dollar.
      In a sign of what Borio describes as "credit market exuberance," government debt in emerging market economies totaled $11.7 trillion at the end of 2016, more than twice the figure at the end of 2007, before the global financial crises, with Brazil,  China and India accounting for around $8 trillion of that total.
     But debt is not just rising in emerging markets, but also in developed markets, with leverage conditions in the U.S. at the highest since the beginning of this millennium and similar to those in the early 1990s when corporate debt reflected the legacy of the leverage buyout boom of the late 1980s.
      "Taken together, this suggests that, in the event of a slowdown or an upward adjustment in interest rates, high debt service payments and default risk could pose challenges to corporates, and thereby create headwinds for GDP growth," BIS said.
      Equity market investors are now using record amounts of margin debt to lever up their investments although equity valuations appear stretched by historical standards. Outstanding margins debt is now substantially higher than during the dot come boom and around 10 percent higher than its previous peak in 2015.
      The rise in margin debt comes as valuations of equity markets become stretched, according to traditional valuations methods, with long-run price/earnings ratios above averages.
       But BIS also found that given the unusually low bond yields, valuations may not be out of line as bond yield premium remain well below historical averages.
      "This suggest that equity markets continue to be vulnerable to the risk of a snapback in bond markets, should term premia return to more normal levels," BIS said.

      Click to read the BIS Quarterly Review, September 2017.


Friday, September 15, 2017

Russia cuts rate another 50 bps and expects further cuts

     Russia's central bank cut its policy rate for the fourth time this year, as almost universally expected, and held out the prospect of further cuts in the next two quarters depending on inflation.
     The Bank of Russia cut its key rate by 50 basis points to 8.50 percent and has now cut the rate by a total of 150 basis points this year. This follows cuts of 100 basis points in 2016 and 600 points in 2015 as the rate is gradually lowered from 17 percent in December 2014.
     Although inflation has fallen sharply since early 2015 and is now below the central bank's target of 4.0 percent, the bank's board said it would continue to conduct "moderately tight monetary policy" as inflation expectations were still not anchored at a low level and the risks that inflation will deviate on the high side of the target still outweigh the risks of low inflation.
     "During the next two quarters, the Bank of Russia deems it possible to cut the key rate further," the central bank said, adding that in making its decision it "will assess the risk of inflation's material and sustainable deviation from the target, as well as consumer price movements and economic activity against the forecast."
      Russia's economy is continuing to pull away from the recession in 2015 and 2016, with economic growth in the second quarter of this year topping forecasts on investment and consumer demand.
      Russia's Gross Domestic Product surged by an annual rate of 2.5 percent in the second quarter of this year, up from 0.5 percent in the first quarter
      "In view of the positive trend set by Q2, the forecast for GDP growth in 2017 has been revised upwards to 1.7 - 2.2%," the central bank said, adding high consumer demand under the current conditions still doesn't pose a significant risk to inflation due to expanding supply.
       In July the central bank forecast growth this year of between 1.3 and 1.8 percent.
      Russia's headline inflation rate fell to 3.3 percent in August from 3.9 percent in July to the lowest rate since 1991 on a seasonal decline in vegetable and fruit prices along with lower transport costs.
      But the central bank is not just satisfied with reaching its inflation target but wants to change consumer's reaction to fluctuations and permanently anchor inflation expectations.
      As inflation continues to fall, changes to volatile components, such as vegetable and fruit prices, becomes more pronounced and inflation may therefore deviate to the upside and downside next year.
       These temporary changes to the prices of popular items then feed into inflation expectations so in order to keep inflation close to 4 percent in the longer term, "it is necessary to make inflation expectations less sensitive to price movements," the bank said.
      Russia's ruble has been rising steadily since January 2016, despite a recent dip from new U.S. sanctions, and was trading around 57.6 to the U.S. dollar today, up 6.4 percent since the start of this year.

Thursday, September 14, 2017

Peru cuts rate another 25 bps, next move tied to inflation

      Peru's central bank lowered its monetary policy rate for the third time this year and said it would keep an eye on inflation to decide if further changes to the monetary policy stance are necessary.
       The Central Reserve Bank of Peru (BCRP) cut its policy rate by 25 basis points to 3.50 percent and has now cut the rate by 75 basis points this year following cuts of the same size in May and July.
       Today's cut comes after the central bank in August said it was paying close attention to inflation and inflation determinants in order to continue easing its monetary policy stance in the short term.
       This dovish stance was followed by the bank's president, Julio Velarde, who on Aug. 21 said there was room for one or two more rate cuts this year as a rise in inflation to over 3 percent in August was temporary and due to a sharp rise in water utility rates.
       Peru's inflation rate rose to 3.17 percent in August from 2.85 percent in July, topping the central bank's target range of 1-3 percent. Earlier this year Peru's inflation rate spiked due to shortages of some food items following devastating floods in March that killed more than 100 people.
       But the BCRP said a rise the prices of some food products and water tariffs would have only a transitory effect on inflation, and excluding water and lemon prices, inflation was only 2.41 percent.
       Excluding food and energy, inflation rose to 2.57 percent in August from 2.36 percent and overall inflation expectations 12 months ahead continued to decline and reach 2.7 percent in August.
      "Inflation is forecast to converge to the target range during 2017 and remain within this range during 2018," the BCRP said.
       While economic activity in Peru remains below its potential level, the central bank said activity is expected to recover due to higher government and private spending and business expectations remain on the optimistic side.
       The central bank forecast economic growth this year of 2.5 to 3.0 percent, the same as it forecast last month.
        Peru's economy expanded by an annual rate of 2.4 percent in the second quarter of this year, up from 2.1 percent in the first quarter.

BOE maintains policy but prepares to withdraw stimulus

     The Bank of England (BOE) left key interest rate and its stock of assets unchanged but took a major step toward tightening monetary policy as a majority of its policy makers now judge that "some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target."
      The prospect of a rate increase in coming months took markets by surprise and pound sterling immediately jumped over 1 percent to US$1.336 and is now 8.6 percent higher than at the start of this year. However, it still remains 6.6 percent below its level before the June 2016 vote on Brexit.
      The central bank of the United Kingdom has maintained its benchmark bank rate at 0.25 percent since August 2016 when it was slashed to a record low in the wake of Britain's surprise decision to leave the European Union (EU), commonly known as Brexit. 
       On top of the August rate cut - the bank's first since March 2009 during the global financial crises - the BOE also launched a package of stimulus measures that included the purchase of 10 billion pounds of corporate bonds and expanded its purchases of government bonds by 60 billion pounds to total of 435 billion to cushion the economy from the uncertainty that will accompany the country's adjustment to life outside the EU bloc.
      The shift to a more hawkish tone by the BOE's nine-member monetary policy committee (MPC) reflects stronger-than-expected UK economic growth that is eroding "a fairly limited degree" of spare capacity faster than expected and will likely push inflation "above" 3.0 percent in October.
      This compares with last month when MPC saw inflation peaking "around" 3 percent in October.
      The BOE targets inflation of 2.0 percent and in August inflation rose to 2.9 percent from 2.6 percent in the previous two months.
       Given the dampening impact on the economy from uncertainties during negotiations about Britain's future outside the EU, the BOE has accepted a temporary rise of inflation above its target and kept rates at a historic low to avoid economic slowdown.
       But with the economy continuing to perform better than expected, the BOE is now preparing to reduce monetary stimulus to curb inflation and join other major central banks, such as the U.S. Federal Reserve and the Bank of Canada in reigning in years of ultra-easy monetary policy.
      As in June and August, two MPC members - Ian McCafferty and Michael Saunders - again voted to immediately raise the bank rate by 25 basis points to 0.50 percent while the other seven thought the current rate was appropriate. 
      At its next meeting in November, the MPC will update its inflation and growth forecasts. 
      In August the BOE lowered its 2017 growth forecast to 1.7 percent from 1.9 percent forecast in May and the 2018 growth forecast to 1.6 percent from 1.7 percent. 2019 growth is seen at 1.7 percent.
       Inflation in the third quarter of 2017 was seen at 2.7 percent, up from the May forecast of 2.6 percent, and then easing to 2.6 percent in Q3 2018 and 2.2 percent in Q3 2019.
       The bank rate, as implied by market interest rates, was seen unchanged at 0.2 percent in the third quarter of this year, rising to 0.5 percent in the Q3 2018, up from the previous forecast of 0.3 percent, and then rising further to 0.6 percent in Q3 2019, up from 0.4 percent.
       Although the U.K. economy only grew by 0.3 percent in the second quarter from the first quarter, the BOE noted the unemployment rate in the three months to July fell further to 4.3 percent to the lowest level in over 40 years and employment is expected to remain strong as demand continues to grow in excess of supply.

Ukraine holds rate but warns of hikes to curb inflation

     Ukraine's central bank kept its key policy rate at 12.50 percent but turned more hawkish in response to accelerating inflation and warned it may "raise its key policy rate to mitigate inflationary pressures and return inflation to the target level."
      The National Bank of Ukraine (NBU) has been easing its monetary policy since August 2015 and has cut the key rate by a total of 1,750 basis points since then.
      But the NBU's last rate cut was in May and since then inflation has continued to accelerate.
      Ukraine's headline inflation rose to a higher-than-forecast 16.2 percent in August, up from 15.9 percent in July and the fourth consecutive month of rising inflation.
      The rise in inflation was due to higher raw food and tobacco prices along with second-round effects from rising meat and dairy prices along with higher labor costs.
      In its statement, the NBU repeated its guidance from August that it may keep its policy rate at the current level until there are clear signs of an easing of inflation risks and will resume the easing cycle once inflation risks abate and inflation expectations become well anchored.
       However, today it also raised the prospects of reversing the recent easing cycle by warning it may "resort to a tighter monetary policy" if inflationary pressures rise.
      This is a much stronger statement than last month when it said it will "implement a rather tight monetary policy for a longer term to put inflation back on a downward trend."
      The NBU pointed to a possible rise in inflationary pressures from higher social standards that are inconsistent with the economy's productivity growth and higher inflation expectations.
       Despite the rise in inflation, the central bank still expects inflation to trend downward in the second half of this year as underlying inflationary pressures remain moderate and this year's rise in the exchange rate of the hryvnia helps restrain inflation.
       However, inflation is now expected to decelerate at a slower pace than forecast in the July inflation report, which saw inflation easing to 9.1 percent by the end of this year.
      "As a result, the 2017 year-end inflation is projected to deviate more significantly from the mid-point target range (8% +/- 2 pp for end-2017)," the NBU said, adding demand pressures are likely to rise as consumption is picking up from higher wages, government spending and pensions.
      It added that it expects inflation to return to the mid-point of its target range in the second quarter of 2018. Last month it expected inflation to return to the midpoint "throughout the first half" of 2018.
      The central bank targets inflation of 7.5 percent, plus/minus 2 percentage points, by the end of the first quarter of 2018 and 7.0 percent by the end of the second quarter of 2018.
       After tumbling in 2014 and 2015, the hryvnia has been more stable since March 2016 and risen against the U.S. dollar this year on improved exchange rate expectations and better global conditions for Ukrainian export commodities.
       A drop in the exchange rate since late August was attributed by the NBU to "temporary and psychological factors, with economic agents' behavior following a seasonal pattern."
       The hryvnia was trading at 26.18 to the dollar today, up 3 percent this year.

Turkey holds rates, notes strong economy, inflation risk

     Turkey's central bank kept its key short-term interest rates and said it would maintain a tight monetary policy due to the elevated level of inflation while it acknowledged "the recovery in economic activity has gained strength."
      Earlier this month the Central Bank of the Republic Turkey (CBRT) raised its end-2017 inflation forecast to 8.7 percent from April's forecast of 8.5 percent and January's forecast of 8.0 percent.
      However, the CBRT still expects inflation to ease to 6.4 percent next year before stabilizing around its 5.0 percent target in the medium term.
      "Current elevated levels of inflation and developments in core inflation pose risks on the pricing behavior," the central bank said as it omitted July's reference to disinflation from improved costs and a partial correction in food prices.
       In August Turkey's headline inflation rate rose to 10.86 percent from 9.79 percent in July while core inflation rose to 9.6 percent from 9.2 percent.
       As in recent months, the central bank underlined it will maintain a tight policy stance until there is a "significant improvement" in the outlook for inflation and will tighten policy, if needed.
      While the CBRT has maintained its key one-week repurchase rate at 8.0 percent since November 2016, it has been tightening its policy stance by other means, such as raising other key rates, including the late liquidity lending rate, the rate it pays on local lenders' U.S dollar reserves and required reserve ratios in a bid to boost the value of the lira and slow down inflation.
     The CBRT today upgraded its view of Turkey's economy and described economic activity as gaining strength in comparison with its previous policy statement in which it merely said data indicated "an ongoing recovery in economic conditions."
       "Domestic demand conditions keep improving and demand from the European Union economies continues to contribute positively to exports," the central bank said.
       Turkey's economy grew by 2.1 percent in the second quarter from the first quarter for annual growth of 5.1 percent, slightly down from 5.2 percent in the first quarter.
       Turkey's lira has been firming steadily since hitting a historic low of 3.87 to the U.S. dollar late January. However, it has slipped this week and was trading at 3.46 to the dollar today, down from 3.41 at the end of last week.
     But compared with the start of this year, the lira is still up 2 percent against the dollar.

Saturday, September 9, 2017

This week in monetary policy: Argentina, Croatia, Switzerland, Turkey, U.K., Ukraine, Chile, Peru and Russia

    This week (September 10 through September 16) central banks from 9 countries or jurisdictions are scheduled to decide on monetary policy: Argentina, Croatia, Switzerland, Turkey, United Kingdom, Ukraine, Chile, Peru and Russia.
    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.

SEP 10 - SEP 16, 2017:
COUNTRY                 DATE                RATE           LATEST                 YTD               1 YR AGO       MSCI
ARGENTINA 12-Sep 26.25% 0 150 26.75%          FM
CROATIA 13-Sep 2.50% 0 0 2.50%          FM
SWITZERLAND 14-Sep -0.75% 0 0 -0.75%          DM
TURKEY 14-Sep 8.00% 0 0 7.50%          EM
UNITED KINGDOM 14-Sep 0.25% 0 0 0.25%          DM
UKRAINE 14-Sep 12.50% 0 -150 15.00%          FM
CHILE 14-Sep 2.50% 0 -100 3.50%          EM
PERU 14-Sep 3.75% 0 -50 4.25%          EM
RUSSIA 15-Sep 9.00% 0 -100 10.00%          EM