Friday, March 4, 2011

Monetary Policy Week in Review - 5 March 2011

The past week saw 11 central bank monetary policy announcements, with 4 rate changes; all increases, and all emerging and developing markets. The banks that reviewed policy and held were: Australia, Canada, Poland, the EU, Indonesia, Mexico, and West Africa. Those that increased rates were: Azerbaijan +200bps, Brazil +50bps, Tajikistan +75bps, and the Dominican Republic +100bps. Other policy moves included a+25bps increase to the required reserve rate for banks in Peru. Other notable events in monetary policy included the significantly more hawkish tone of the European Central Bank monetary policy announcement, suggesting that it could raise rates as soon as next month.

Thus some overall themes to takeaway from the week in monetary policy includes the divergence of economic prospects and inflation experience in developed versus emerging markets. All of the developed economies held rates, and most of the emerging market economies raised rates, or signaled further policy tightening. But of course, the running theme was that of higher agricultural commodity prices and a geopolitical risk driven spike in energy prices creating upside inflation risks. The EU in particular identified the risks of second round effects on inflation (rather than the initial headline inflation impact). Indeed this is a significant source of upside inflation risk for central banks at the moment, so it is important that they anchor inflation expectations - but without derailing economic growth.

Next week the main central bank meeting on the calendar is the Reserve Bank of New Zealand monetary policy statement - which could prove interesting. Elsewhere, China will release its main statistics next week, which has in the past been a popular time for the People's Bank of China to make policy moves (e.g. after a high inflation figure), so watch this space.


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