The transition from five years of ultra-easy global monetary policy is spearheaded by the U.S. Federal Reserve which began unwinding its asset purchases in January. This has helped trigger 11 rate rises so far this year, including those by central banks in Turkey, South Africa, India, Ghana and Zambia in an effort to protect their currencies and retain foreign investment
While there is still a lingering debate over what Fed Chair Janet Yellen really meant to signal on March 19, other central banks and financial markets have taken her words - and those of other members of the Federal Open Market Committee - to heart and expect the Fed to raise rates earlier than expected.
In their statements last week the Bank of Israel noted that “the interest rate path expected by FOMC members increased compared with the previous meeting,” the South African Reserve Bank (SARB) said “financial markets now believe that the first interest rate increases may occur earlier in 2015 than previously expected,” and the Central Bank of Trinidad and Tobago said the Fed gave guidance that “policy interest rates could increase even faster than initially anticipated.”
The shift in the direction of global capital away from emerging and frontier markets to advanced economies has gone through several bouts of volatility since May last year and central banks are eager to avoid fanning the flames and cause any sudden shift in risk sentiment.
But as William Dudley, president of the New York Fed, said last week, emerging markets are much better positioned than in the past “to weather those times in the cycle when the external environment turns from welcoming to wary” due to a raft of reforms and changes, including more coherent monetary policy frameworks, the absence of fixed exchange rates, larger foreign exchange reserves, moderate debt and stronger banking systems.
South Africa, Nigeria and the Philippines’ central banks illustrate Dudley’s point. Most emerging market central banks are keenly aware of the challenges they are facing from the well-publicized shift in Fed policy and are responding in a disciplined and predictable manner.
Last week SARB said it remains in a tightening cycle but added that this doesn’t mean rates have to be changed at every meeting. SARB maintained its rate after raising it by 50 basis points in January in response to capital outflows and a plunge in the rand.
The recent improvement in global sentiment towards emerging markets had boosted the rand and thus improved the inflationary outlook, giving the central bank breathing space as it seeks to solve the dilemma of sluggish growth and inflationary pressures.
Like SARB, the Central Bank of Nigeria (CBN) also maintained its policy rate, but tightened policy by raising the cash reserve requirement on private sector deposits – in January it had raised the CRR on public sector deposits – saying the need to safeguard stability “required firm and bold measures.”
"Thus, prudent monetary stance would also facilitate better reserve and exchange rate management in an environment where Fed tapering increases pressure on emerging economies’ financial markets," CBN said, showing a steady hand amid a challenging international and domestic environment.
Bangko Sentral ng Pilipinas (BSP) also kept its policy rate steady but raised the reserve requirement to curb liquidity in a move that was signaled by the central bank’s governor last week after he said an early and gradual adjustment of monetary policy rather than discreet movements would be less disruptive to businesses.
The Philippine central bank added that it would “consider further adjustments in its policy tools to safeguard price and financial stability" and "buoyant domestic growth prospects allow some scope for a measured adjustment in the BSP's policy instruments amid the ongoing normalization of monetary policy overseas."
The annexation of Crimea by Russia from Ukraine added a new dimension to the global risk spectrum, but the National Bank of Georgia responded in a calm and measured manner.
The central bank of Georgia – on the eastern border of the Black Sea in the Caucasus region – said it still believed that monetary stimulus should be withdrawn but put off any rate rise, citing the potential threat from geopolitical factors and uncertainty that could undermine investors’ mood, demand for its exports and remittances from workers abroad.
Through the first 13 weeks of this year, rates have been raised 11 times, or 9 percent of this year’s 125 policy decisions by the 90 central banks followed by Central Bank News, down from 10 percent at the end of February.
But the Global Monetary Policy Rate (GMPR) – the average policy rate – rose to 5.56 percent this week from 5.53 percent at the end of January, helped by Zambia’s 175 basis-point rate rise.
Rates have been cut 15 times so far this year, or 12 percent of this year’s policy decisions, down from 14 percent at the end of February, as central banks still seek to shore up growth while inflationary pressures worldwide are kept at bay from sluggish global demand.
LIST OF LAST WEEK’S CENTRAL BANK DECISIONS:
- Israel holds rate, changes depend on CPI, growth, shekel
- Hungary cuts rate for 20th time but signals pause
- Armenia holds rate, inflation seen falling further
- Nigeria holds rate, raises CRR to 15%, bold moves needed
- Morocco maintains rate, cuts reserve ratio by 200 bps
- Georgia holds rate on geopolitical risk, but sees tightening
- Rwanda holds rate to sustain credit to private sector
- Philippines holds rate, raises RR, to mull further tightening
- Norway holds rate, repeats on hold until summer 2015
- Taiwan holds rate on moderate growth, mild CPI outlook
- South Africa holds rate, but remains in tightening cycle
- Czech holds rate, confirms will intervene to cap FX rate
- Romania maintains rate after 6 cuts on subdued inflation
- Zambia raises rate 175 bps to 12% in 2nd hike in row
- Trinidad holds rate, sees rising inflationary pressure
TABLE WITH LAST WEEK’S MONETARY POLICY DECISIONS
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This week (Week 14) six central banks will be deciding on monetary policy, including Australia, India, Brazil, Uganda, Ghana and the European Central Bank.
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