Last week four central banks
took monetary policy decisions with two banks (Turkey and Colombia) taking
further steps to ease their stance while the other two (Thailand and Namibia)
kept rates on hold, illustrating how monetary policy on a global scale remains
accommodative despite fresh signs that the cycle of loose policy is nearing its end.
Ultra-low interest rates in
advanced economies continues to push funds toward higher yielding yet safe
currencies, such as Turkey and Thailand, with Turkey’s central bank drawing on its arsenal to prevent capital inflows from boosting its
currency and domestic assets while the economy is weak.
But the main focus of last week was the Federal Reserve’s minutes from its January meeting that showcased the
intensifying debate over how and when the Fed should exit from quantitative
easing.
While there is no doubt of the
Fed’s commitment to easy money and questions over the economic impact of
its latest asset purchase program, global financial markets are hyper-sensitive
to any sign the program is coming to an end.
The strong reaction of markets
for the second month in a row to a debate over when to rein in quantitative easing illustrates
the intense pressure on the Fed to choose its exit route carefully so it
doesn’t destroy markets’ and consumers’ fragile confidence and derail the economic recovery.
China’s move to drain funds
from markets for the first time in eight months also served to remind financial
markets of just how accommodative global monetary policy is - and has been for
the last five years - and how the global shift to a more neutral policy is
likely to be a recurring theme.
Through the first eight weeks
of this year, 77 percent of this year’s 69 policy decisions among the 90
central banks followed by Central Bank News have favoured unchanged rates compared
with 19 percent of decisions favouring rate cuts. This ratio is steady from
last week.
While the overall global
economy remains sluggish, the contrast between Colombia and Thailand shows how
growth in Asia is continuing to pick up speed while the slowdown in most of
South America has yet to ease its grip.
Colombia’s central bank cut its key rate for the sixth time since it
embarked on an easing cycle last July and is concerned that low inflationary
expectations could become entrenched amid a weakening economy, a sign that
further rate cuts are likely.
The
Bank of Thailand is facing the opposite situation with its economy growing
faster than expected and growing inflationary pressures. It is among the
handful of Asian central banks that may raise rates later this year to curtail
inflation from a combination of strong domestic demand, growing exports and
capital inflow that is pushing up its currency and adding further fuel to asset
prices.
Turkey’s creative and flexible
monetary policy was once again on display this week as the bank tries to find
the right balance between stimulating economic growth yet discouraging hot
money from flowing into the country to take advantage of the relatively high
interest rates.
While the Central Bank of the
Republic of Turkey eased its policy stance by cutting short-term rates, it
combined this with a “measured tightening” of reserve requirements – a
macroprudential measure - to limit capital inflows and excessive bank lending.
Meanwhile, the benchmark interest rate, seen as a more heavy-handed tool, was
left unchanged.
The immediate effect was that
the Turkish lira fell, showing that its nimble and multi-pronged policy is
still paying off.
| COUNTRY | MSCI | NEW RATE | OLD RATE | 1 YEAR AGO |
| TURKEY | EM | 5.50% | 5.50% | 5.75% |
| THAILAND | EM | 2.75% | 2.75% | 3.00% |
| NAMIBIA | 5.50% | 5.50% | 6.00% | |
| COLOMBIA | EM | 3.75% | 4.00% | 5.25% |
Other events that financial markets will closely follow include Italy’s
general election on Sunday and Monday and Federal Reserve Chairman Ben
Bernanke’s scheduled testimony on Tuesday and Wednesday to the Senate Banking
Committee.
| COUNTRY | MSCI | MEETING | RATE | 1 YEAR AGO |
| ANGOLA | 25-Feb | 10.00% | 10.25% | |
| ISRAEL | DM | 25-Feb | 1.75% | 2.50% |
| HUNGARY | EM | 26-Feb | 5.50% | 7.00% |
| TRINIDAD & TOBAGO | 28-Feb | 2.75% | 3.00% |
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