For the month of December, GMPR – the average policy rate for the 90 central banks tracked by Central Bank News – fell to 5.42 percent as 2013 was characterized by declining rates each and every month from January's 5.85 percent.
Global monetary policy in 2013 was characterized by a high degree of monetary activism, with central banks in advanced economies pulling out all stops to stimulate economic growth, illustrated by the Bank of Japan’s (BOJ) aggressive easing campaign, rate cuts by the European Central Bank (ECB) and the adoption of forward guidance by the ECB and Bank of England (BOE) to help suppress rising bond yields.
But amidst the general trend of monetary easing, the U.S. Federal Reserve started preparing markets for a gradual retreat from its extraordinary accommodative policy due to an improving economy, a likely sign that global policy rates reached a nadir in 2013.
After a false start in September, the Federal Reserve finally decided in December to start trimming asset purchases by a $10 billion to $75 billion a month - the undisputed highlight of global monetary policy in December, and arguably the main feature of 2013.
In order to take the sting out of its message that it would wind down its extraordinary accommodative policy, the Fed also said its policy rate, the fed funds rate, would be held at essentially zero “well past the time” that U.S. unemployment drops below 6.5 percent, the Fed’s previous threshold for considering changes to its policy rate.
In addition to the Fed’s shift to a less expansive policy, the Reserve Bank of New Zealand on Dec. 11 signaled that it will be raising rates in 2014 and several Asian central banks, such as those of Malaysia, the Philippines and Taiwan are expected to follow suit during 2014.
Indonesia, India and Turkey already tightened policy in 2013 and may continue this year, depending how currency and capital markets, and thus inflation, adjust to the Fed’s reduction in asset purchases. Brazil, which raised rates by a total of 275 basis points in 2013, is expected to end its tightening cycle in the near future.
Other highlights of monetary policy in December include the Reserve Bank of India’s (RBI) surprise decision to hold off on any rate rises in the expectation that inflation will start to decline. Describing its decision as a close one, with obvious risks of market disruptions while waiting for fresh data, the RBI says it doesn’t want to tighten policy unless it has to for fear of damaging the economy.
Sweden’s central bank, the Riksbank, was also a highlight of December, cutting its rate by 25 basis points and pushing back any rate rise until early 2015 from a previously-targeted late 2014 due to lower than expected inflation.
In December policy rates fell by a total of 495 basis points due to rate reductions by the central banks of Albania, Armenia, Botswana, Egypt, Hungary, Serbia, Sweden, Uganda and Uzbekistan.
The lone rate riser in December was Tunisia, which raised its rate by 50 basis points, resulting in a net decline in rates of 445 points.
The gradual unwinding of the Fed’s asset purchases will remain the dominant theme of 2014 global monetary policy, along with the ECB’s handling of the threat of deflation, the BOJ’s response to an increase in sales taxes and the BOE’s answer to a drop in unemployment towards its threshold for considering changing its policy stance.
In 2013 44 central banks cut their policy rates by a total of 5,651 basis points – an average of 128 basis points - while eight raised rates by a total of 1,450 points – an average of 181 points - for a net reduction of 4,202 points.
This compares with 2012 when policy rates were cut by a net 6,475 basis points as 47 central banks cut rates by an average of 180 basis points while 11 banks raised rates by an average of 182 points.
But 2012 was also characterized by a rise in GMPR to 6.2 percent from 6.0 percent in 2011 with the 2012 average skewed by some very large rate hikes – Malawi raised rates by 1200 basis points – and the fact that some central banks first starting cutting rates in the second half of the year when the global economy started to decelerate.
Global policy rates tumbled in 2009 and 2010, with GMPR falling to 5.22 percent and 4.27 percent respectively, as central banks slashed rates as the global financial crises spread.
Interest rates then moved higher in early 2011 on optimism that the global economy was on the mend, with GMPR rising to 6.0 percent. But it proved to be a false dawn with Europe’s sovereign debt crises, Japan’s tsunami, unrest in the Mideast and political gridlock in the U.S. souring hopes for a speedy recovery.
In 2013 Gambia was the world’s largest rate riser, boosting rates by 600 basis points, or 40 percent of the total rise in global rates. Brazil was the second largest rate riser with 275 basis points followed by Indonesia with 175 basis points.
Sierra Leone was the world’s largest rate cutter last year, reducing its rate by 800 basis points, followed by Belarus’ reduction of 650 basis points. Belarus was 2012’s top rate cutter with 1500 basis points.
GLOBAL MONETARY POLICY RATES (GMPR)
(Changes in December 2013 and year-to-date, in basis points)
|CONGO DEM. REP.||-100|
|WEST AFRICAN STATES||-50|