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).
LIST OF LAST WEEK’S CENTRAL BANK DECISIONS:
- Dominican Republ. Maintains policy rate at 6.25%
- Gambia holds rate at 20.0% to anchor inflation expectations
- Mauritius holds rate, mulls move to counter inflation risks
- Australia holds rate and sees period of stable rates
- Romania sees sharp drop in H1 inflation, then within target
- Uganda holds rate, drops warning about inflation
- Poland maintains rates, still sees steady rates until end-H1
- Philippines holds rates, says inflation is manageable
- Bank of England maintains rate, QE size, as expected
- Czech holds rate, FX targets, cuts Q1 inflation forecast
- ECB says euro area in prolonged inflation period
- Ghana raises rate 200 bps on elevated inflation, FX risks
- Botswana holds rate on positive inflation outlook
OTHER STORIES LAST WEEK:
TABLE WITH LAST WEEK’S MONETARY POLICY DECISIONS:
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This week (Week 7) nine central banks will be deciding on monetary policy, including Armenia, Iceland, Georgia, Indonesia, Sweden, Serbia, Korea, Peru and Russia.
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