This week five central banks took policy decisions with one bank, Ghana, raising rates while the other four (Nigeria, Japan, South Africa and Trinidad & Tobago) maintained rates as global stock markets reacted strongly to the prospect of the Federal Reserve winding down its quantitative easing.
While Federal Reserve Chairman Ben Bernanke didn’t really say anything new to a U.S. senate committee about the timing or conditions for a withdrawal of the extraordinary stimulus, his remarks followed a spate of warnings about the growing risks of quantitative easing and the challenges facing major central banks when they enter unchartered waters and start to normalize monetary policy
The previous week the general manager of the Bank for International Settlements (BIS) and a paper from the International Monetary Fund highlighted the risks of a prolonged period of ultra-easy monetary policy.
Then this week the governor of South Korea’s central bank pointed to the risks from the U.S exiting quantitative easing, Canada’s banking regulator said low rates were raising the risks for banks and Canada’s finance minister warned that too much capital was “sloshing around the world” which tends to create asset bubbles, as witnessed in 2007.
If anyone needed proof that quantitative easing is boosting shares as an asset class, it was delivered by Thursday’s 7.3 percent plunge on the Tokyo stock market in reaction to weak Chinese data and Bernanke’s comments. Ever since it became clear that Japan’s government was pushing the Bank of Japan to loosen its policy further, the stock market has been on a tear.
But illustrating the bind that policy makers find themselves in, Federal Reserve Bank of St. Louis President James Bullard called on the European Central Bank to look to Japan and also take aggressive action, including quantitative easing, to avoid Japan’s fate of 15 years of deflation and weak economic growth.
This week’s policy decisions from five central banks were largely as expected with the BOJ affirming its ambitious target for asset purchases and playing down the economic impact of the recent rise in bond yields.
The South African Reserve Bank (SARB) once again painted a bleak picture of the country’s economic prospects but held rates steady given the upside risks to inflation from wage rounds and the fall in the rand.
The lack of rate cuts this week was in stark contrast to a flurry of rate cuts in recent weeks in response to softer global growth, lower commodity prices and thus inflationary pressures, and the BOJ’s aggressive monetary easing that has lead to a plunge in the value of the yen and fears of capital inflows in other countries.
Since April 1, central banks have cut policy rates 20 times for a total rate reduction of 945 basis points, almost twice the number of rate cuts in the first quarter of this year. The BOJ announced its "new phase of monetary easing" on April 4.
Through the first 21 weeks of this year, 24 percent of 200 policy decisions by the 90 central banks followed by Central Bank News have lead to rate cuts, slightly down from 25 percent after the previous week.
This week’s rate rise by Ghana pushed up the cumulative decline this year in global policy rates by 100 basis points to 2,151 basis points.
It also raised the Global Monetary Policy Rate (GMPR), the average policy rate of 90 central banks, to 5.65 percent from 5.64 percent last week, but this is still well below 6.2 percent at the end of 2012.
Most central banks keep their rates on hold from week-to-week with 72 percent of all policy decisions so far this year favouring steady rates, slightly up from 71 percent at the end of the previous week.
LAST WEEK’S (WEEK 21) MONETARY POLICY DECISIONS:
| COUNTRY | MSCI | NEW RATE | OLD RATE | 1 YEAR AGO |
| NIGERIA | FM | 12.00% | 12.00% | 12.00% |
| GHANA | 16.00% | 15.00% | 14.50% | |
| JAPAN | DM | 0% | 0% | 0.10% |
| SOUTH AFRICA | EM | 5.00% | 5.00% | 5.50% |
| TRINIDAD & TOBAGO | 2.75% | 2.75% | 3.00% |
NEXT WEEK (week 22) features nine scheduled central bank policy meetings, including Israel, Hungary, Thailand, Canada, Brazil, Fiji, Moldova, Angola and Colombia.
| COUNTRY | MSCI | DATE | RATE | 1 YEAR AGO |
| ISRAEL | DM | 27-May | 1.50% | 2.50% |
| HUNGARY | EM | 28-May | 4.75% | 7.00% |
| THAILAND | EM | 29-May | 2.75% | 3.00% |
| CANADA | DM | 29-May | 1.00% | 1.00% |
| BRAZIL | EM | 29-May | 7.50% | 8.50% |
| FIJI | 30-May | 0.50% | 0.50% | |
| MOLDOVA | 30-May | 3.50% | 8.00% | |
| ANGOLA | 31-May | 10.00% | 10.25% | |
| COLOMBIA | EM | 31-May | 3.25% | 5.25% |
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