Last week 11 central banks kept their policy rates steady while Romania cut its rate for the third time in a row as the U.S. Federal Reserve’s surprise decision to delay a tapering of its asset purchases now looks like a very astute and prescient move given the economic fallout from the shutdown of the federal government and growing nervousness over the debt limit.
In its statement from Sept. 18 the Fed said it would “await more evidence that progress will be sustained before adjusting the pace of its purchases” and last week Atlanta Federal Reserve Bank President Dennis Lockhart said the disruptions from political gridlock in Washington D.C. had "vindicated" the Fed's decision.
The Fed already said in June that “fiscal policy is restraining economic growth” and San Francisco Fed President John Williams voiced what appears to be growing frustration within the Fed over the inability of politicians to pull in the same direction as the central bank.
"Every time there is another factor holding us back, whether it is tax policy, whether it is spending ... it just means we have to keep interest rates lower for longer. We have to do more active purchases," Williams was quoted as saying in San Diego.
But it’s not only the Fed that is continuing with extraordinary accommodative monetary policy, ultra-easy policy is seen across most advanced economies and last week the European Central Bank (ECB) confirmed that its policy would “remain accommodative for as long as necessary” and further stimulative measures were possible if money market rates were to rise.
One of the recurring themes among advanced central banks since May, when global bond yields rose in response to the prospect of reduced asset purchases by the Fed, has been to assure markets and investors that monetary policy will not be tightened before the economic recovery is truly on a sound footing and unemployment rates are down to more normal levels.
Sweden’s Per Jansson, a member of the Riksbank’s board, was the latest to push back against financial markets’ expectations of tighter policy.
Financial markets are currently pricing in a 50 percent chance of a Swedish rate rise in April 2014, but Jansson said this was too soon and the central bank’s plan was to wait until the end of end of next year before tightening.
Global monetary policy thus continues on on divergent paths, with most advanced economies continuing with extremely loose policy while some major emerging markets have been tightening to stamp out inflationary pressures from currency depreciation.
In addition to the ECB, the Bank of Japan (BOJ) last week also maintained its aggressive policy stance, the Reserve Bank of Australia (RBA) kept its cash rate at a record low, adding “a lower level of the currency than seen at present would assist in rebalancing growth in the economy,” while the National Bank of Poland confirmed that it expected to keep its reference rate at a record low at least until the end of this year.
Other banks that maintained policy rates last week included Angola, Mauritius, Zambia, the Dominican Republic, Iceland, Uganda and Botswana. (Click on the links to read the story.)
Through the first 40 weeks of this year, the global trend toward lower policy rates remains in tact although it may have bottomed out following the recent rate rises by several emerging markets.
Policy rates have been cut 89 times so far this year, or 22.8 percent of this year’s 389 policy decisions by the 90 central banks followed by Central Bank News, down from 23.3 percent the previous week and 23.6 percent two weeks ago and 25.3 percent after the first half of 2013.
Meanwhile, central banks have raised rates 21 times, or 5.4 percent of this year’s policy decisions, down from 5.6 percent the previous week but up from 4.7 percent at then end of June. Emerging markets account for 43 percent of the 21 rate rises, with Brazil, Indonesia and India accounting for eight of those rate rises.
LAST WEEK’S (WEEK 40) MONETARY POLICY DECISIONS:
This week (week 41) six central banks are scheduled to hold policy meetings, including those from Indonesia, Brazil, Croatia, South Korea, United Kingdom and Peru. Singapore’s monetary authority is also likely to hold its bi-annual policy meeting next week but the exact date has not been released.
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