The trend in global monetary policy took another small step toward tightening this week as Turkey raised its overnight lending rate, India tightened liquidity and New Zealand warned it may have to raise rates, putting it on course to become the first central bank in a developed market to increase policy rates since early 2011.
But while a handful of central banks are reacting to pressure on currencies and inflation, the overall global trend is still toward lower policy rates due to “choppy” global growth (to borrow a phrase from the Bank of Canada) with one central bank cutting its rates this week and nine keeping rates on hold.
Hungary continued its year-long rate cutting spree, reducing its policy rate for the 12th time in a row, raising the number of rate cuts worldwide through the first 30 weeks of this year to 69 compared with 14 rate increases among the 90 central banks covered by Central Bank News.
The Global Monetary Policy Rate (GMPR), the average nominal policy rate, eased by one basis point to 5.64 percent after Hungary’s 25 basis point cut but the decline is clearly slowing as the GMPR was unchanged at 5.65 percent in May and June after falling rapidly in the first months of the year.
The fallout from the expected reduction in monetary stimulus by the U.S. Federal Reserve on financial markets has been truly all-embracing and global, triggering reactions this week alone from the central banks of Turkey, Hungary, Nigeria, the Philippines and even Trinidad and Tobago.
Illustrating the sudden rise in market volatility, the central banks of the Philippines, Turkey and Hungary all used the word “caution” this week to describe their approach to policy decisions.
Though both Turkey and India tightened their policy, they have not taken the more symbolic step of raising benchmark rates, keeping some of their ammunition dry. The other central banks that held rates steady this week include Colombia, Sri Lanka, Fiji and Moldova.
So far only Brazil and Indonesia have raised policy rates since Federal Reserve Chairman Ben Bernanke’s eye-popping testimony on May 22, but it is clear that global monetary policy is now starting to diverge, reflecting the different stages of recovery from the 2007-2009 financial crises.
The shift in global capital flows in May and June, which triggered a fall in emerging market currencies and higher global bond yields, exposed the structural weaknesses of some emerging market countries, with Turkey, India, Brazil and South Africa all saddled with current account deficits.
But countries with more solid economic fundamentals, for example the Philippines which is enjoying strong domestic demand and a current account surplus, have room to manoeuvre and have taken the small fall in their currencies in stride.
South Korea, Thailand and Colombia seem to be enjoying the competitive advantage of lower exchange rates and the benefits of government stimulus programs, a path that Russia is now pursuing.
While three central banks said they were cautious this week, the Central Bank of Nigeria showed firm determination by raising the reserve requirements on deposits that banks collect from the public sector to 50 percent from 12 percent.
Explaining why the reserve requirement was raised so much, the central bank’s outspoken governor, Lamido Sanusi, described the “perverse incentive structure” under which the country’s public sector deposits its funds at close to zero percent interest in banks. The banks then lend the money back to the government and public sector, charging interest of 13 or 14 percent.
Little wonder that the growth of private credit in Nigeria is sluggish when a bank can turn a profit on lending to the public sector.
Underscoring the stronger economic fundamentals of Asian economies, the Bank for International Settlements (BIS) released its latest preliminary banking data, showing a continuation of the recent trend: Higher lending to emerging Asia and lower lending to Europe.
But BIS data also showed that banks were now more confident about lending to Asia, with their exposure to credit risk in that region rising at a faster pace than their actual lending.
Historically, banks have transferred credit risk on loans away from emerging markets but a significant shift happened in the first quarter of this year when the transfer of risk into Asia for the first time exceeded the transfer of risk out of the region.
The Reserve Bank of New Zealand’s (RBNZ) introduction of a tightening bias this week is the latest example of how central banks are increasingly sensitive to the impact of asset prices – in this case housing - following the experience of the global financial crises.
New Zealand is hardly alone in trying to keep property prices in check as the central banks of Sweden, Norway, Canada and Switzerland face similar challenges. Another similarity between New Zealand, Sweden and Canada is a tightening bias in monetary policy with Sweden earlier this month signaling that it would start raising rates in the second half of next year.
While warning about the potential spillover to inflation from the housing market, the New Zealand central bank assured financial markets that it expected to keep rates on hold through this year, and economists first expect a rate rise in 2014.
If the RBNZ raises rates next year, it is likely to be the first time a developed market central bank raises rates since early 2011.
On average global policy rates rose in 2006 and 2007 but then tumbled from October 2008 and continued to fall in 2009 and 2010. In early 2011 the global economy appeared to be on the mend, responding to massive government stimulus and extraordinary accommodative monetary policy, before it was derailed by Europe’s sovereign debt crises, political indecision in the United States, the Japanese tsunami and political upheaval in the Middle East.
Israel was the first developed country to tighten its policy in January 2011 but it reversed course in September and cut rates. Sweden also raised rates in February that year but reversed course in December 2011.
Since then, only emerging market and frontier market central banks have raised rates in response to inflation apart from Denmark whose rates are only adjusted to keep its currency around a narrow peg to the euro.
Through the first 30 weeks of this year 24.1 percent (69 decisions) of this year’s 286 rate decisions by 90 central banks have favoured rate cuts, down from 24.6 percent last week and 24.8 percent the previous week.
LAST WEEK’S (WEEK 30) MONETARY POLICY DECISIONS:
|COUNTRY||MSCI||DATE||RATE||1 YEAR AGO|
|TRINIDAD & TOBAGO||2.75%||2.75%||3.00%|
NEXT WEEK (week 31) eight central banks are scheduled to hold policy meetings, including Angola, Israel, India, the United States, the United Kingdom, the European Central Bank, the Czech Republic and Egypt.
The Fed is not scheduled to hold a press conference after the meeting of its Federal Open Market Committee (FOMC), one of the reasons markets are not expecting any major policy changes. The next scheduled press conference by Fed Chairman Ben Bernanke is Sept. 18 as there is no FOMC meeting in August.
|COUNTRY||MSCI||DATE||RATE||1 YEAR AGO|