Saturday, July 20, 2013

Monetary Policy Week in Review – Jul 15-19, 2013: 2 banks hold rates as Fed’s QE policy dominates global markets

    The global consequences of the U.S. Federal Reserve’s planned wind up of quantitative easing again dominated monetary policy this week, from testimony in Washington D.C. to talks in Moscow by the G20 finance leaders, as the only two central banks to meet maintained their policy rates.
    The decisions by the Bank of Canada (BOC) and the South African Reserve Bank (SARB) were largely expected so markets’ interest was mainly focused on any changes to the banks’ outlook, especially by the BOC’s new governor, Stephen Poloz.
    But any hopes of fireworks from Poloz were dashed, confirming expectations that he would bring continuity and a steady hand to the BOC. Though the wording of the bank's forward guidance was tweaked, the message was the same: At some point rates will go up as the economy normalizes. The economic forecast was also updated and largely in line with expectations.
    Three of the five new governors that have taken office this year among the world's major central banks have made substantial policy changes at their first opportunity.
     Haruhiko Kuroda at the Bank of Japan (BOJ) launched the new phase of monetary easing, Mark Carney at the Bank of England (BOE) took the first step toward using forward guidance while Agus Martowardojo at Bank Indonesia (BI) raised rates for the first time since February 2011 in a pre-emptive to reduce inflation expectations and stabilize the rupiah currency.
    Changes by the other two new governors of major central banks - Elvira Nabiullina of the Bank of Russia and Poloz at BOC - have so far been more subtle
    Worldwide, 12 banks have changed governors so far this year, including the Bank of Israel (BOI) whose designated head, former Governor Jacob Frenkel, is having to testify over what he describes as an “unfortunate misunderstanding” that appears to involve a bottle of perfume or cologne at a duty free shop in Hong Kong airport in 2006.
    In addition to Japan, Canada, the U.K., Russia, Indonesia and Israel, the central banks of Venezuela, Slovenia, Rwanda, Ukraine, El Salvador and the Democratic Republic of Congo have new governors or presidents this year.
    (Click here for a list of all central bank governors)

    In South Africa, Gill Marcus, the first female governor of SARB, found herself in the uncomfortable position of having to keep interest rates steady despite weakening economic growth, due to inflationary pressures from a decline in the rand currency.
    The rand has been caught up in the general downdraft from the expected withdrawal of asset purchases by the U.S. Federal Reserve later this year, down 14 percent against the U.S. dollar this year.
    But this pressure comes on top of a general depreciation of the rand since March last year as labour unrest in the country’s critical mining industry has undermined investors’ confidence. Since early March last year, the rand has lost almost one-quarter of its value against the U.S. dollar.
    So far, the impact on South Africa’s inflation rate from the rand’s drop and higher import prices has been contained by weak pricing power amid a sluggish economy. But Marcus is worried that any further drop in the rand would quickly fuel inflation.
    Just as finance ministers and central bank governors started arriving for their Group of 20 meeting in Moscow, the People’s Bank of China took another step toward freeing up its state-controlled financial system and moving toward a market-based system.
   The move, which was widely flagged, was described by the PBOC as aimed at “further promoting market oriented interest-rate reform” by “full liberalization of financial institutions lending control.”
    Like most central banks, China’s central banks targets interest rates to control inflation and since July 2012 the benchmark one-year lending rate has been 6.0 percent and the one-year deposit rate 3.0 percent.
    The PBOC also sets a maximum limit on the interest rates that banks can pay depositors and a minimum rate on banks’ loans, ensuring the banks are profitable so they can finance the planned investments in China’s economy.
    The minimum lending rate had been 70 percent of the 6.0 percent benchmark rate, i.e. 4.2 percent while the maximum deposit rate was 110 percent of the 3.0 percent deposit rate, i.e. 3.3 percent, giving banks a guaranteed margin of minimum 90 basis points.
    The central bank has now scrapped the minimum rate that banks can charge for loans, a move that should cut the cost to companies and allow the banks to compete with the shadow banking sector.
    For now, the PBOC retained the ceiling on what banks can pay depositors, but it is only a question of time before that restriction is lifted.

    Through the first 29 weeks of this year, central bank policy rates have been cut 68 times, or 24.6 percent of the 276 policy decisions taken by the 90 central banks followed by Central Bank News, marginally down from 24.8 percent last week and down from 25.4 percent the previous week.
    While the global trend towards lower policy rates paused this week, the number of rate rises has slowly rising. Policy rates have been raised 14 times this year, accounting for 5.1 percent of all decisions, steady from last week.


CANADA DM  1.00% 1.00% 1.00%
SOUTH AFRICA EM 5.00% 5.00% 5.00%

    NEXT WEEK (week 30) eight central banks are scheduled to hold policy meetings, including Turkey, Nigeria, Hungary, Sri Lanka, the Philippines, New Zealand, Fiji and Trinidad & Tobago.

COUNTRY MSCI              DATE               RATE        1 YEAR AGO
TURKEY EM 23-Jul 4.50% 5.75%
NIGERIA FM 23-Jul 12.00% 12.00%
HUNGARY EM 23-Jul 4.25% 7.00%
SRI LANKA  FM 24-Jul 7.00% 7.75%
PHILIPPINES EM 25-Jul 3.50% 3.75%
NEW ZEALAND DM 25-Jul 2.50% 2.50%
FIJI 25-Jul 0.50% 0.50%
TRINIDAD & TOBAGO 26-Jul 2.75% 3.00%


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