Friday, April 1, 2011

Monetary Policy Week in Review - 2 April 2011

The past week saw further continuation of the emerging market tightening theme. The following Banks that reviewed monetary policy settings decided to raise rates: Albania +25bps to 5.25%, Mauritius +50bps to 5.25%, Israel +50bps to 3.00%, and Taiwan +12.5bps to 1.75%. Meanwhile Pakistan, Hungary, Morocco, and Romania all held their policy rates steady, but with Romania adjusting its reserve requirement ratio.

As noted, the key theme of emerging market monetary policy tightening continued as inflation rates broadly crept up across emerging market economies. Looking to the financial markets, commodities continued to track upward, with corn even triggering price limit breaks in futures trading following concerns on supply. So the emerging markets inflation and subsequent monetary policy tightening theme is still alive and well. But it's increasingly becoming a developed market inflation story also, and the week ahead will be very telling in terms of the course of developed market inflation and monetary policy.

Next week there are a few key events in developed market monetary policy. The Reserve Bank of Australia meets early in the week and is expected to hold its rate at 4.75%. Following the RBA, the US Federal Open Market Committee will release the meeting minutes from its 15th of March meeting, this will be a very interesting read as tensions start to brew over whether they're doing too much, and when to pull back stimulus, and so-on. Finally the Bank of England will review policy, but is expected to hold its bank rate at 0.50% and the asset purchase program at GBP 200 billion. But the main event is the European Central Bank, which the market is widely expecting - and the Bank has repeatedly signalled - the ECB to raise its key policy rate by 25 basis points to 1.25%  in order to combat second round inflation effects and normalize policy settings. So it should be an interesting week in developed markets central banking.


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