Monetary Policy Week in Review - 27 Nov 2010

The past week saw several emerging market economies review their interest rate settings. Among those reviewing monetary policy were Russia, Mexico, Georgia, Kenya, Poland, Nigeria, Angola, and Israel. The main standout was Angola, which slashed its benchmark rate -394 basis points to 18.00% as a new central bank governor took the helm. All the other banks held their policy rates, judging that conditions justified the current settings, e.g. to promote economic growth, and as an appropriate level for their various inflation targets. Another interesting point though was the normalization steps by Israel and Nigeria, with both banks adjusting the spread between borrowing and lending; Nigeria raised the borrowing rate 100bps to 4.25%, and Israel widened the spread around its policy rate of 2.00% to 50 basis points.

So it was very much a week of holding, with many of the banks seeing current rates as appropriate for their economies, but the justifications varied, for example Poland held at 3.50% because it viewed core inflation as stable, while Nigeria held at 6.25% as inflation remained high. There is always the problem for central bankers of balancing the risks of inflation and growth, and given current and recent global economic conditions, now more than ever this balance is a critical one to get right. Next week the European Central Bank meets to review monetary policy settings, that meeting will be an interesting one and we will be reviewing the press release closely given the recent issues around sovereign debt. There is also a handful of other banks meeting next week, so keep checking in on CentralBankNews.info for the latest developments in monetary policy.

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Monetary Policy Week in Review - 20 Nov 2010

Over the past week the central banks of Colombia, Philippines, South Africa, Chile, Sri Lanka, Rwanda, and South Korea all announced monetary policy decisions. The main standouts were interest rate increases by Chile +25bps, and Korea +25bps, as rising activity levels and inflation risks played through. While the central banks of South Africa -50bps, and Rwanda -100bps both loosened policy settings in order to support the economic recovery and spur lending. Of course the other big news piece was China raising the deposit reserve ratio for its banks by another 50bps on Friday, as inflation accelerates in world's second largest economy.

So the trend of growing diversity in economic prospects remains. In some countries the risk of inflation and overheating is starting to outweigh the risks to growth, while others are placing the priority on sustaining the economic recovery. In the coming week there are no major central bank meeting scheduled, but there will be much attention paid to the work underway in Ireland by the EU, IMF, and ECB, to prepare a plan and loan package to deal with the banking sector and fiscal issues. The other possibility is further tightening from China, with the markets having been spooked by the prospects for another rate rise as inflation pressures begin to boil. So keep checking in on CentralBankNews.info for the latest developments in monetary policy.

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Monetary Policy Week in Review - 13 Nov 2010

This week the central banks of Serbia, Peru, Malaysia, and Turkey announced their interest rate decisions. But the main surprise was from China with the People's Bank of China raising the required reserve ratio for banks by 50bps in response to rapid loan growth and rising inflation. Turkey also raised its required reserve ratio 50bps and dropped the rate on its overnight deposits by 400bps to discourage hot capital inflows. The only bank to adjust its main policy rate was the National Bank of Serbia, which raised its rate 100bps to 10.50% from 9.50% due to rising inflationary pressure and faster than expected recovery in aggregate demand.

So not a huge amount of activity over the past week, but with the China move it was hardly quiet on the monetary policy front. Indeed the move has spurred speculation that China may raise its key monetary policy rate before the year is out. There are no major central bank meetings scheduled for next week.

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Monetary Policy Week in Review - 6 Nov 2010

This week saw Monetary Policy decisions from the central banks of Azerbaijan, Australia, India, Romania, Iceland, US, Japan, Egypt, UK, EU, Vietnam, Czech Republic, Indonesia, and Latvia. The main event was the announcement from the US FOMC to commence a US $600 billion asset purchase program (aka QE2 or the second round of quantitative easing), the Fed will implement the plan at a pace of $75 billion per month. On the interest rate front the standouts were tightening of monetary policy rates in Azerbaijan (100bps), Vietnam (100bps), Australia (25bps), and India (25bps), and loosening of monetary policy rates in Iceland (75bps), and Latvia (12.5bps). Meanwhile other banks held rates due to low inflationary pressures and a desire to keep stimulatory monetary policy conditions to aid the economic recovery e.g. US, EU, UK, Japan.

So the period of synchronicity in monetary policy was short lived (and amounted to the mass loosening at the height of the crisis). Increasingly monetary policy decisions are being driven by the individual circumstances of each country (which is what it should be doing). Those that are facing greater risks to inflation than growth are tightening and those with greater risk to growth are loosening or holding at record low levels. Next week is set to be relatively more quiet with much of the world's central banks having announced their regular decisions.

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Iceland Central Bank Drops Rates 75bps

The Central Bank of Iceland dropped all of its key interest rates by 75 basis points. The new rates will be: deposit rate (current account rate) 4.0%, the maximum bid rate for 28-day certificates of deposit (CDs) 5.25%, the seven-day collateralised lending rate 5.5%, and the overnight lending rate 7.0%. The bank noted the drop in inflation as a driver of the decision:

The Monetary Policy Committee considers that, if the króna remains stable or appreciates and inflation subsides as forecast, the premises for some further monetary easing should be in place. However, the prospect of removing the capital controls creates uncertainty about short-term room for manoeuvre. The MPC stands ready to adjust the monetary stance as required to achieve its interim objective of exchange rate stability and ensure that inflation is close to target over the medium term.

The Central Bank of Iceland next meets on the 8th of December 2010.


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Reserve Bank of India Raises Rates 25bps

The Reserve Bank of India raised the repurchase rate 25bps to 6.25% from 6.00% and also raised the reverse repurchase rate by 25bps to 5.25% from 5.00%. The increase was driven by relatively high inflationary pressure, as well as relatively robust economic growth, however the RBI Governor Duvvuri Subbarao noted that the prospect of further rate hikes in the “immediate future is relatively low.” The RBI is likely also conscious of the prospective quantitative easing moves and currency weakening that are widely expected to be announced by the US Federal Reserve and Bank of Japan this week.

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Reserve Bank of Australia Increases Cash Rate to 4.75%

The Reserve Bank of Australia increased the cash rate by 25 bps to 4.75% from 4.50%. The RBA in announcing its decision noted the weight of risks were slanted to inflation with the Australian economy benefiting from a high terms of trade:

"However, the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity. Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains. At today's meeting, the Board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent."

The next Reserve Bank Board meeting is on the 7th of December 2010.

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