Friday, March 25, 2011

Monetary Policy Week in Review - 26 March 2011

The past week saw several emerging market economies review interest rates, with many making further policy tightening adjustments. Of those that lifted their monetary policy interest rates were: Nigeria +100bps to 7.50%, Kenya +25bps to 6.00%, Uruguay +100bps to 7.50%, and the Philippines +25bps to 4.25%. Meanwhile the other central banks held their rates: Turkey 6.25%, Russia 8.00%, South Africa 5.50%, and the Czech Republic 0.75%. Aside from tightening official policy interest rates, a couple of the central banks made adjustments to required reserve ratios in order to tighten liquidity, those that tightened reserve requirements were: Turkey +300bps to 15%, and Russia +100bps to 5.5% (and +50bps to 4%).

So the global monetary policy picture continues to be dominated by emerging market policy tightening. The policy tightening measures are also not limited to the standard interest rate adjustments, as demonstrated this week by Turkey and Russia, and China in the previous week. As previously noted much of the inflation drivers have come in the form of surging agricultural and energy commodity prices, with strong aggregate demand adding pressure, as well as capital flows and strong liquidity growth.

The picture will however become increasingly murky towards the middle of the year as these policy adjustments start to kick in; any substantial changes in commodity prices will be the wild card. It also puts increasing emphasis on policy risks, as emerging markets attempt to pull down inflation - but without crashing their economies into a hard landing. But it is imperative that these economies do make a strong effort to limit inflation, particularly as periods of significant food price inflation tend to have a destabilizing impact (IMF research) on low income countries. Thus close monitoring of monetary policy actions in these economies has become increasingly important.


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1 comment:

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