Saturday, June 8, 2013

Monetary Policy Week in Review – Jun 3-7, 2013: 3 cut, 6 hold rates, markets adjust to withdrawal of global liquidity

    This week nine central banks took policy decisions with three cutting rates (Uganda, Poland and Serbia) and the other six (Australia, BOE, ECB, Mexico, Sri Lanka and West African States) maintaining rates as global markets continue to adjust to the reality that the U.S. Federal Reserve at some point will cut back on asset purchases.
     Foreign exchange, bond and stock markets worldwide have been hyper sensitive since late May to the eventual decline in global liquidity from a U.S. tapering of bond purchases, a theme that suddenly relegated the Bank of Japan’s massive quantitative easing from early April to second place on the global agenda.
    But both forces are very powerful and will continue to dominate financial markets and influence central banks’ policy decisions in the short term.
    The latest manifestation of how most central banks, especially smaller ones, are in a constant battle to to adapt to the huge flows of capital, came from the Central Bank of Uruguay. From next month it will replace interest rate as a reference tool for monetary policy with monetary aggregates.
    Given the massive influx of foreign capital in recent years to Uruguay to take advantage of high interest rates and a relatively stable economy, the central bank said the benchmark interest rate had lost its signaling capacity and relevance for markets.
    While keeping its inflation target at 5.0 percent, the central bank widened its tolerance band to 2 percentage points, with the new range from 3.0 percent to 7.0 percent from 4-6 percent.

     This week the Bank of Mexico warned that downside risks to the country’s growth had risen after the drop in the peso and the rise in domestic interest rates, while the Reserve Bank of Australia continued its recent policy of talking down its currency.
     Although the Mexican central bank acknowledged that its economy would benefit from stronger growth in the United States, central banks in Latin America remember all too well how a tightening of U.S. monetary policy in the 1980s and 1990s triggered financial crises in the region.
     Mexico’s central bank again held its policy rate steady this week, following its 50-basis-point cut in March, but said further exchange rate volatility is likely even if global liquidity remains abundant following a gradual withdrawal of U.S. asset purchases.
    Last week the peso, along with the currencies of other emerging markets, tumbled in response to fears that the Federal Reserve would soon taper asset purchases.
    Meanwhile in the Eastern hemisphere, Australia’s central bank continued its recent policy of talking down its dollar, adding that the outlook for inflation would afford its scope for further monetary easing.
    Last month the RBA cut its rate for the first time since November 2012, taking the steam off the dollar, which has now fallen some 8 percent against the U.S. dollar since the May rate cut and some 9 percent since the beginning of the year.
    Nevertheless, the RBA last week continued its jawboning campaign, repeating that the Australian dollar was still high, despite its recent depreciation, in light of the lower export prices.

    Other decisions this week featured the Bank of England (BOE) and the European Central Bank (ECB), with both banks – as expected - keeping rates steady.
    At the BOE, it was Governor Mervyn King’s swan song as he retires at the end of the month, making room for Mark Carney who left the Bank of Canada to take the reins of the BOE on July 1.
    In addition to leaving rates on hold, the BOE also kept its asset purchase program on hold; the target of 375 billion pounds was last raised in July 2012. In the previous four meetings King, along with two other committee members, have failed in their attempts to boost the asset purchases by 25 billion.
     Whether King again failed to persuade his colleagues at his final meeting will first be known when the meeting’s minutes are released on June 19.
    In Frankfurt, ECB President Mario Draghi downgraded his economic forecast slightly. Although he still expects the suffering euro zone economy to “stabilize and recover” during the year, he admitted the recovery will “subdued.”
    The ECB’s staff trimmed their 2013 forecast for Gross Domestic Product to contract by 0.6 percent, up from the March forecast of a 0.5 percent fall, but still an improvement from 2012’s 1.5 percent shrinkage.
    As in the recent past, Draghi confirmed that the ECB would retain an accommodative policy stance “as long as necessary.”
    Through the first 23 weeks of this year, central bank policy rates have been cut 54 times, or 25 percent of the 219 policy decisions taken by the 90 central banks followed by Central Bank News. This is up from 24 percent after 22 weeks.
    The number of rate increases this year was stable at 11, or 5.0 percent of all policy decisions, slightly down from last week’s 5.2 percent but still higher than 4.5 percent after week 21.


AUSTRALIA DM 2.75% 2.75% 3.75%
UGANDA 11.00% 12.00% 20.00%
WEST AFRICAN STATES 3.75% 3.75% 4.00%
POLAND EM 2.75% 3.00% 4.75%
UNITED KINGDOM DM 0.50% 0.50% 0.50%
EURO AREA DM 0.50% 0.50% 0.75%
SERBIA FM 11.00% 11.25% 9.50%
SRI LANKA  FM 7.00% 7.00% 7.75%
MEXICO EM 4.00% 4.00% 4.50%

    NEXT WEEK (week 24) features nine scheduled central bank policy meetings, including Russia, Japan, Iceland, Croatia, New Zealand, South Korea, Indonesia, the Philippines and Peru.

COUNTRY MSCI              DATE               RATE        1 YEAR AGO
RUSSIA EM 10-Jun 8.25% 8.00%
JAPAN DM 11-Jun 0.00% 0.10%
ICELAND 12-Jun 6.00% 5.75%
CROATIA FM 12-Jun 6.25% 6.25%
NEW ZEALAND  DM 13-Jun 2.50% 2.50%
KOREA EM 13-Jun 2.50% 3.25%
INDONESIA EM 13-Jun 5.75% 5.75%
PHILIPPINES EM 13-Jun 3.50% 4.00%
PERU EM 13-Jun 4.25% 4.25%


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