Sunday, February 9, 2014

Monetary Policy Week in Review – Feb 3-7, 2014: Australia central bank changes tack, Romania cuts, Ghana raises

    Last week in global monetary policy Romania cut its rate for the second time this year, but then called a halt to further cuts, while Ghana raised its rate to boost the yield on its assets and counter the fall in its currency and thus dampen inflation.
    But the main change to the outlook for global monetary policy came from the Reserve Bank of Australia (RBA), which shifted into a neutral policy stance and eased up on three months of concerted efforts to verbally push down the exchange rate of the Australia dollar.
    The U.S. Federal Reserve’s modest start to to its long-awaited tapering of asset purchases in January is having a dramatic effect on financial conditions worldwide as capital - much of it highly leveraged - drains away from emerging markets and heads back toward advanced economies.
    In the case of Australia, a rate cut in May 2013 triggered a decline in the Australian dollar – known as the Aussie - that was further fueled by weaker external demand for its raw materials and the Fed’s signal on May 22 that it was getting ready to change course after five years of pumping money into the global economy.
    The Aussie dropped 15 percent from a 2013-high of 94.8 cents per U.S. dollar in early April to 1.122 end-December and the pass-through of this decline is now feeding into Australia's inflation rate, which hit a two-year high of 2.7 percent in the fourth quarter.
    In addition to saying that “the most prudent course is likely to be a period of stability in interest rates,” in last week’s policy statement, the RBA toned down its efforts to talk down the Aussie.
   Starting last November, the RBA began describing the Aussie as “uncomfortably high” and its governor, Glenn Stevens, even held out the prospect of intervention in foreign exchange markets as the central bank started a campaign of using exchange rates instead of interest rate cuts to ease financial conditions and spur economic growth.
    But the RBA has now changed tack.
    Last week it merely said that if the recent decline in the exchange rate is sustained, it would asset in rebalancing the economy, signaling that it is comfortable with the current level of the Aussie.
    The combination of a shift to a neutral policy stance and the change in tone about the exchange rate immediately pushed up the Aussie by 2 percent, with the currency ending the week at 1.12 to the U.S. dollar, or 89.6 U.S. cents, slightly higher than the level of 85 cents that Stevens had mentioned in December.
    Through the first six weeks of this year, five central banks have raised rates while rates have been cut six times, or 11.3 percent of this year’s 54 policy decisions.
    Four of this year's rate rises have come from major emerging market central banks (South Africa, Turkey, India and Brazil) with Ghana the fifth to raise rates.
    Only one of this year's rate six rate cuts have come from an emerging market central bank (Hungary), while three from frontier market central banks (two cuts by Romania and once by Jordan) while the other two have been carried out by central banks from other markets (Tajikistan and Uzbekistan).




COUNTRY MSCI      NEW RATE            OLD RATE         1 YEAR AGO
DOMINICAN REPUBL. 6.25% 6.25% 5.00%
GAMBIA 20.00% 20.00% 12.00%
MAURITIUS FM 4.65% 4.65% 4.90%
AUSTRALIA DM 2.50% 2.50% 3.00%
ROMANIA FM 3.50% 3.75% 5.25%
UGANDA 11.50% 11.50% 12.00%
POLAND EM 2.50% 2.50% 3.75%
GHANA 18.00% 16.00% 15.00%
PHILIPPINES EM 3.50% 3.50% 3.50%
UNITED KINGDOM DM 0.50% 0.50% 0.50%
EUROSYSTEM DM 0.25% 0.25% 0.75%
CZECH REPUBLIC EM 0.05% 0.05% 0.05%
BOTSWANA 7.50% 7.50% 9.50%

 This week (Week 7) nine central banks will be deciding on monetary policy, including Armenia, Iceland, Georgia, Indonesia, Sweden, Serbia, Korea, Peru and Russia.

ARMENIA 11-Feb 7.75% 8.00%
ICELAND 12-Feb 6.00% 6.00%
GEORGIA 12-Feb 3.75% 4.75%
INDONESIA EM 13-Feb 7.50% 5.75%
SWEDEN DM 13-Feb 0.75% 1.00%
SERBIA  FM 13-Feb 9.50% 11.75%
KOREA EM 13-Feb 2.50% 2.75%
PERU EM 13-Feb 4.00% 4.25%
RUSSIA EM 14-Feb 5.50% 8.25%


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