The Global Monetary Policy Rate (GMPR) – the average rate of the 90 central banks tracked by Central Bank News – fell to 5.52 percent at the end of October from 5.58 percent in September and August, continuing the trend of declining official interests since November 2011.
During October nine central banks cut their policy rates by a total of 306 basis points versus a total rate rise of 75 points by two banks, resulting in a net decline of 231 points, slightly below the monthly average this year of a 333 point decline.
Global monetary policy in October was distinguished by Chile and Mexico’s surprise rate cuts along with Canada and Norway’s decisions to drop their tightening bias as the central banks took out insurance against slower global growth and any negative impact from U.S. political infighting.
The looser policy stance came on the heels of the U.S. Federal Reserve’s decision in September to delay a tapering of asset purchases while it waits for clear signs of economic improvement. In retrospect, the Fed’s decision looked wise given the subsequent political impasse in Washington D.C. and the government shutdown.
The main reason that markets were surprised by Chile and Mexico’s rate cuts was that there were no glaring signs of a sudden deterioration of economic activity.
But with few inflationary pressures and global demand easing, the central banks of Chile, Mexico, Canada and Norway took the opportunity to head off the expected negative economic impact from the shutdown of the U.S. Federal government and the worldwide uncertainty created by the fear that the U.S. could default on its debt.
“Growth of the United States may have suffered as a result of a partial closure of the federal government and increased uncertainty,” with the effect that downside risks to global growth had risen, said Colombia’s central bank last month.
Neither Chile nor Mexico had warned markets that they were close to cutting rates, though rate cuts had been discussed by the board of the Central Bank of Chile in its previous five meetings.
Explaining the rate cuts, both Chile and Mexico referred to the absence of global inflationary pressure and weak global growth, while Chile added that domestic demand, which had been holding up well, was set to decline.
Buoyant financial markets enabled Chile and Mexico to cut rates as capital was once again flowing to emerging markets following the Fed’s September decision.
Unlike fellow emerging markets of Brazil, Indonesia and India, which have raised rates to defend their currencies and curtail inflation, Chile and Mexico’s had maintained high enough interest rate differentials and stronger economic fundamentals to allow them to ease monetary policy in response to the prospect of weaker growth.
In addition to Chile and Mexico, the other central banks that eased policy last month included Hungary, Jordan, Mozambique, Serbia, Sri Lanka, Tajikistan and Bulgaria.
Rate cuts by Hungary, Mozambique and Serbia were largely expected as the banks were still in an easing cycle but Sri Lanka and Jordan’s easing surprised. Both Sri Lanka and Jordan cited the favourable outlook for inflation while Jordan added that rising foreign exchange reserves had also enabled it to cut rates.
Brazil and India were responsible for the only two rate rises in October and both moves were expected by financial markets.
It was Brazil’s fifth rate rise in a row, and although inflation has been trending downward, markets expect the Central Bank of Brazil to tighten further before it declares victory over inflation.
It was India’s second rate rise in a row but the Reserve Bank of India combined an increase in its policy rate by a cut in its emergency borrowing rate as it continued to unwind the extraordinary measures it took in July to defend the rupee which had plunged in response to the outflow of capital ahead of an expected shift in U.S. monetary policy.
GLOBAL MONETARY POLICY RATES (GMPR)
(Changes in October 2013 and year-to-date, in basis points)
|WEST AFRICAN STATES||-50|
|SUM: (EXCLUDING. INDIA)||306||-4611|
|SUM: (INCLUDING INDIA)||75||1325|