The Global Monetary Policy Rate (GMPR) - the average policy rate of the 90 central banks followed by Central Bank News – rose to 5.59 percent in September from 5.58 percent in August, breaking the trend of declining rates every single month since November 2011.
After slashing rates from late 2008 through 2010 in response to the global financial crises, central banks started to tighten policy in early 2011 as the global economy responded to government stimulus and extraordinary accommodative monetary policy, including asset purchases or quantitative easing.
But confidence that the global economy finally was on a self-sustaining path was soon undermined by the lethal combination of the devastating earthquake and tsunami in Japan in March 2011, the euro area’s sovereign debt crises and political wrangling over the U.S. debt ceiling.
The response was fresh rounds of asset purchases by those central banks that were already at the zero bound – the U.S. Federal Reserve, the Bank of England and the Bank of Japan - and rate cuts by other central banks, including Brazil, Turkey, Thailand, Sweden, Norway, Indonesia, Israel, and the European Central Bank, which also launched two rounds of longer-term refinancing operations
The rise in global policy rates in early 2011 was thus quickly reversed and since November 2011 global rates have been falling. In January 2012 GMPR was 6.52 percent and ended the year at 5.92 percent as the euro area’s recession dragged on and overall global economic growth was sluggish.
This trend of falling policy rates remained firmly in place through 2012 and early 2013. But since May this year global financial conditions have tightened in response to expectations of a turning point in the Federal Reserve’s policy stance, signs of economic rebound in advanced economies and a stabilization in emerging markets, including China.
During September five central banks raised policy rates – India, Indonesia, Pakistan Uganda and Bulgaria – for a cumulative rate rises of 201 basis points.
India’s rate rise to limit inflation was combined with a cut to its marginal standing facility rate to reverse July’ exceptional measures taken to defend the embattled rupee. Indonesia also raised its rate to push down inflation and stabilize its rupiah while Pakistan and Uganda took aim at inflationary expectations.
Meanwhile, six central banks cut rates – Mexico, Israel, Egypt, Hungary, Romania and West African States – for gross cuts of 170 basis points, the lowest monthly total this year.
Mexico surprised financial markets by cutting its rate to boost economic growth, Israel cut in anticipation of slower global growth and a rise in its shekel, Egypt cut to stimulate activity undermined by political turmoil, Hungary continued its easing cycle, Romania responded to lower inflation and the West African States cut to head off the risk of slower economic growth.
The end result was that GMPR rose by a net 31 basis points in September, the first time this year that rates rose on a monthly basis. But taking a step back and looking at the first nine months of the year, policy rates have been cut by a cumulative 43.30 percentage points and only raised by 11.50 points, illustrating how loose monetary policy has been.
Whether September heralds a definite nadir in policy rates is unclear at this point. The Federal Reserve’s timeline for winding down its asset purchases has been pushed back and it's too soon to gauge the impact on the U.S. and global economy from the political debate surrounding the U.S. debt ceiling and federal budget that has led to a U.S. federal government shutdown.
GLOBAL MONETARY POLICY RATES (GMPR)
(Changes in September 2013 and year-to-date, in basis points)
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