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:
| COUNTRY | MSCI | NEW RATE | OLD RATE | 1 YEAR AGO |
| AUSTRALIA | DM | 3.00% | 3.00% | 4.25% |
| UGANDA | 12.00% | 12.00% | 22.00% | |
| ROMANIA | 5.25% | 5.25% | 5.50% | |
| ICELAND | 6.00% | 6.00% | 4.75% | |
| CZECH REPUBLIC | EM | 0.05% | 0.05% | 0.75% |
| POLAND | EM | 3.75% | 4.00% | 4.50% |
| UNITED KINGDOM | DM | 0.50% | 0.50% | 0.50% |
| EURO AREA | DM | 0.75% | 0.75% | 1.00% |
| SERBIA | FM | 11.75% | 11.50% | 9.50% |
| PERU | EM | 4.25% | 4.25% | 4.25% |
| PAKISTAN | FM | 9.50% | 9.50% | 12.00% |
| AZERBAIJAN | 4.75% | 5.00% | 5.25% |
| COUNTRY | MSCI | MEETING | RATE | 1 YEAR AGO |
| PHILIPPINES | EM | 11-Feb | 3.50% | 4.25% |
| MOZAMBIQUE | 11-Feb | 9.50% | 15.00% | |
| INDONESIA | EM | 12-Feb | 5.75% | 5.75% |
| RUSSIA | EM | 12-Feb | 8.25% | 8.00% |
| GEORGIA | 13-Feb | 5.25% | 6.50% | |
| SWEDEN | DM | 13-Feb | 1.00% | 1.50% |
| JAPAN | DM | 14-Feb | 0.10% | 0.10% |
| SOUTH KOREA | EM | 14-Feb | 2.75% | 3.25% |
| SRI LANKA | FM | 15-Feb | 7.50% | 7.50% |
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