Last week 12 central banks took monetary policy decisions with only two banks cutting rates (Poland and Azerbaijan), Serbia again raising its policy rate and the remaining nine banks (Australia, Uganda, Romania, Iceland, the Czech Republic, United Kingdom, the European Central Bank, Peru and Pakistan) keeping rates steady.
Although the trend of easier monetary policy continues, it appears to be slowing down as a growing number of central banks hit the pause button to give last year’s rate cuts time to take effect.
Australia most clearly illustrated this trend last week, saying the full impact of last year's "significant easing" on economic activity would take further time to become apparent. The Reserve Bank of Australia was the most aggressive rate cutter among developed market central banks last year, slashing its key rate by 125 basis points.
Through the first six weeks of the year, one in five central banks (21 percent) have cut their rates while 74 percent of the 53 banks that have taken policy decisions have kept rates on hold.
Emerging market central banks are still the most active rate cutters, accounting for five of this year’s 11 rate cuts among the 90 central banks followed by Central Bank News. No central banks in developed markets have cut rates this year, but that is partly due to the fact that several of those banks have already cut rates to effectively zero and are now pursuing quantitative easing.
Poland was the latest emerging market central bank to cut rates last week. After four consecutive rate cuts, the National Bank of Poland omitted sending a clear signal about its next move, unlike previous months. That said, the bank did say there was still a risk that inflation would drop below its target, a clear indication the bank is willing to cut rates if inflation continues to drop on weak demand.
Although the Bank of England left rates on hold, it issued an unusually verbose statement after its policy committee meeting, sending a clear signal that it was still far from tightening policy despite the persistence of above-target inflation.
If it were to try to force inflation down to its 2 percent target by suddenly withdrawing stimulus, the BOE said it would risk derailing the muted economic recovery, raising the prospect that inflation then undershoots the bank’s target.
Mark Carney, future BOE governor, faced a UK parliamentary committee for the first time since he was picked to replace Mervyn King, providing him with an opportunity to reveal his thinking about changing the bank’s policy framework.
In addition to welcoming a debate about BOE policy, the current Bank of Canada governor said he thought the bank’s flexible inflation target was still “the most effective monetary policy framework implemented thus far.”
Carney thus managed to assure markets of continuity in BOE policy and simultaneously pointed to a likely evolution of the bank’s policy framework that is better suited to address the U.K.’s tepid economic recovery - an adept diplomatic move.
In Frankfurt, European Central Bank President Mario Draghi repeated his view that he expects the euro area economy to recover later this year, but added that the risks remain to downside as demand may fail to rebound, exports may remain weak and structural reforms may get off track.
Although Draghi describes ECB policy as accommodative, the ECB is effectively carrying out a form of quantitative tightening with its balance sheet shrinking as banks pay back more of the funds they borrowed during last year’s successful longer-term refinancing operations (LTROs), which helped reverse the growing fears that the entire single currency project was coming undone.
LAST WEEK’S (WEEK 6) MONETARY POLICY DECISIONS:
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