Monday, July 23, 2012

Global Interest Rate Movements: Half-Year Review 2012

    This article reviews the monetary policy interest rate activity of the world's central banks during the first six months of 2012 until the end of June.
    Of the 89 central banks that we monitor, 48 (54%) kept their monetary policy interest rates unchanged, 29 banks (33%) cut rates and 12 banks (13%) increased rates.
    The dominant theme among the major central banks that kept rates on hold was the limitation of interest rates, the traditional tool of monetary policy, in stimulating economic growth when consumers, banks and governments are reducing their debt.
    Of those banks that cut rates, the main reason was to stimulate economic activity at a time of a slowing global economy amidst heightened uncertainty from the euro area debt crises.

         Of the banks that loosened monetary policy by cutting interest rates, the average reduction was 124.4 basis points (or 82.5 basis points excluding Belarus). 
   As usual the most common reduction quantum was 25 basis points, with 11 of 29 rate cutters opting for 25 points, while 5 went for 50 points and 4 went for 75 points. 
    The largest rate cut was delivered by the National Bank of Belarus, which cut a net 1,300 basis points or 13 percentage points to 32%. Vietnam -400bps, Uganda -300bps, and Brazil -250bps also made significant rate reductions as the focus on risks shifted from inflation to economic growth.

    In the tightening camp the average interest rate increase was 102.1 basis points, with a 50 basis point increase being the most common (4 out of 12), and 5 hiking rates by more than 100bps.
    Most of the countries hiking rates were in lesser developed regions, where it is common for general price levels to be more sensitive to food price inflation and uncontrollable movements in exchange rates; in addition a few of these countries had relatively strong growth, e.g. Mongolia. Malawi hiked rates the most, lifting its monetary policy rate by 300 basis points, while Ghana 250bps, Cape Verde 150bps, Mongolia 100bps and Iceland 100bps were among those making the highest interest rate increases.

    As noted, the dominant theme was for interest rates to remain unchanged; particularly where the limits of monetary policy stimulus has been reached e.g. in the US, Japan, and Europe. However, among emerging markets, and selected developed markets, the emphasis was more on easing policy to help provide good conditions for growth within a challenging global environment.

    Indeed, for most central banks that cut rates or kept rates at stimulatory levels, the rationale was to provide a pre-emptive measure in response to the euro crisis and its negative impact on confidence. Meanwhile, other reasons for the rate level was a response to a slowing economy; particularly among those with a higher exposure or sensitivity to international trade.

    The inflation picture was also a key determinant, as rates of annual consumer price inflation began to ease around the world, with some pundits warning of deflation in Europe and the US; while Switzerland did in fact experience deflation.

    Heading into the second half of 2012, it is likely that most economies will regain momentum following softening in growth through the first half. The key downside risk emanates largely from the European sovereign debt crisis, and the extent to which it can be contained, and default – and associated bank panics – avoided.

    But there are upside risks too; monetary policy settings are broadly very accommodative, and businesses have anecdotally held-off from investment decisions, and now have stronger balance sheets; banks have broadly experienced similar trends. Meanwhile, growth is likely to rebound in the second half of the year in China, and other emerging markets.

    So it could well be that towards the end of the year inflation becomes more of an issue than sustaining economic growth. But it wouldn’t take much for growth and inflation to remain subdued for the remainder of the year, so unchanged interest rates may remain the dominant theme.

    In any case, keep checking the central bank news website for timely monetary policy updates.



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