Central banks in developed and emerging markets cut policy rates by a further 1.75 percentage points in December, trimming their average interest rate to 3.33 percent from 3.38 percent in November, cementing 2012 as a year of perpetual easing by major central banks to counter global economic weakness.
But higher rates in response to inflation by three (Malawi, Uruguay and Serbia) of the 88 central banks followed by Central Bank News meant the global average policy rate in December was steady at 5.92 percent from November.
Although a majority, or 53 percent, of the world’s central banks reduced rates in 2012, the average global monetary policy rate rose to 6.24 percent for the full 2012 year from 2011’s 6.0 percent due to the size of some of the rate hikes and the fact that some central banks first started cutting rates in the second half of the year when the global economy decelerated.
During 2012, 47 of 88 central banks cut rates by an average of 180 basis points while 11 banks, or 12.5 percent, raised rates by an average of 182 points.
The average rate rise was skewed by Malawi’s total rate rise of 12 percentage points in 2012 while the mode, or most frequent, rate rise was 50 basis points.
In comparison, the largest reduction in rates last year came from Belarus, which cut by 1.5 percentage points. But rate cuts were aggressive and worldwide, with 38 of 88 central banks cutting rates by up to 200 basis points.
Although central banks in developed markets started the year with low rates, they continued to ease policy through the year, either through conventional or unconventional means.
In December alone, rate cuts by Australia, Israel and Sweden trimmed the average policy rate among developed central banks to 1.02 percent from 1.08 percent in November. The average rate among emerging market central banks fell to 4.76 percent in December from 4.81 percent in November.
For the full year, developed market central banks cut benchmark interest rates by a total of 400 basis points but this pales in comparison with total rate cuts of 1,126 basis points by central banks in emerging markets.
Rates likely to bottom out in 2013
Policy rates are likely to decline further in the early part of 2013 as inflation continues to drop but the cycle of lower rates is expected to bottom out as the year progresses unless the remaining downside risks facing an improving global economy come to the fore.
During the middle of 2012 the global economy was facing three risks but one of these risks, a sharp fall in Chinese growth, has abated, while the second risk – a U.S. recession due to a lack of political decisions – is starting to look a little less likely following a last-minute agreement that avoided the so-called fiscal cliff. Further agreements, however, are necessary before all U.S. risks are off the table.
The improvement in China’s economy was highlighted in December by several central banks. The Bank of Canada, for example, said “Chinese growth appears to be stabilizing,” Taiwan’s central bank said “China has regained growth momentum” - in contrast to its June statement when it referred to slowing Chinese growth – and Chile’s central bank referred to “more positive signs in some emerging economies.”
That leaves a sudden worsening of the euro area’s economy as the major downside risk facing the global economy.
The global impact of Europe’s recession became increasingly clear in the second half of 2012 as countries that relied on exports to the euro area, such as South Korea and Poland, began cutting rates.
The downturn in Europe, which is expected to linger much of this year, is in contrast to the improving prospects of many other countries that are less dependent on exports to the euro zone.
In December alone, central banks from such geographically diverse countries as Peru, New Zealand, Canada, Turkey, Taiwan, Norway and Colombia looked ahead to stronger growth in 2013.
A consequence of the weaker global economy has been the dissipation of inflationary pressures worldwide with almost every central bank in December commenting on falling inflation and the expected lack of price pressures in 2013.
In some cases, such as Sri Lanka, Uganda and Turkey, lower inflation enabled the central banks to cut rates further. In other countries, such as Sweden and Poland, inflation is either below or at risk of dropping below central bank targets, which also tends to lead to easier monetary policy.
INTEREST RATE CUTS, YEAR-TO-DATE IN BASIS POINTS, DECEMBER 2012:
|DOMINICAN REP.||-175||DENMARK||-50||TRINIDAD & TOBAGO||-25|
|GEORGIA||-150||KUWAIT||-50||WEST AFRICAN STATES||-25|