Global interest rates declined further during January as nine central banks cut rates to shore up economic growth, trimming the average global policy rate of the 90 banks followed by Central Bank News by a net 342 basis points to 5.88 percent from 5.92 percent at the end of 2012.
But the overwhelming majority -73 percent of the 41 central banks that took policy decisions last month – kept interest rates on hold, mainly for three reasons:
Firstly, to allow last year’s rate cuts take effect; secondly, because economic growth is starting to pick up, especially in Asia; and thirdly, because inflation is largely in line with targets.
Most of the 30 central banks that kept rates steady last month cut benchmark rates last year and are now starting to see the benefit of the easier policy on growth, a situation exemplified by Thailand, Indonesia, New Zealand and Israel.
But rate cuts still dominate the central banking landscape, with the Bank of Japan exploring new avenues to banish deflation from its vocabulary. After two decades of sluggish growth and mostly deflation, the BOJ heeded the wish of the new Tokyo government and doubled its inflation target to 2 percent and will embark on unlimited asset purchases next year.
Low and falling inflation was the main reason cited by central banks for January’s rate cuts with scant upward pressure on prices due to weak global demand.
Angola, for example, is experiencing the lowest inflation in recent history, while subdued inflationary pressures were cited by India, Colombia, Hungary, Mongolia and Albania for rate cuts.
Of the 11 central banks that changed rates in January, only Denmark and Serbia raised rates with Denmark’s move reflecting a reversal of last year’s outflow from jittery euro zone investors into the safe haven of Denmark, pushing up its currency.
Given Denmark’s close trade ties to the euro zone, its central bank shadows the euro, adjusting its interest rates to keep the Danish krone within a 2.25 percent band. With money now flowing back into the euro zone, the krone has been weakening, giving the Danish central bank a chance to normalize and raise its record-low rates.
Serbia’s central bank embarked on its seventh rate rise since its current tightening cycle started in mid-2012, continuing its dogged effort to curtail inflationary expectations and prevent higher administered prices from spreading to other consumer prices.
As expected, emerging market central banks have taken advantage of their ability to cut relatively-high interest rates to stimulate growth, with four of January’s nine rate cuts taking place in emerging markets, while central banks in frontier markets - Kenya and Bulgaria - accounted for two cuts.
Central banks in other countries accounted for the remaining three of January's rate cuts.
INTEREST RATE CHANGES, YEAR-TO-DATE IN BASIS POINTS, JANUARY 2013:
|COUNTRY||MSCI||CURRENT RATE||YTD CHANGE|