Sunday, May 18, 2014

Monetary Policy Week in Review – May 12-16, 2014: ECB easing in June seen as a question of how and what, not if

    Last week in global monetary policy, Armenia’s central bank cut its policy rate while four other banks maintained rates as it became clear that it is no longer a question of whether the European Central Bank (ECB) will ease policy, but just what tools it will decide to use.
    The ECB council has already twice discussed how to respond to powerful disinflationary forces and will be armed with the latest forecasts on June 5 when the final decision is taken.
    ECB President Mario Draghi began preparing financial markets and investors for easier policy on April 3 when the council for the first time “had a very rich and ample discussion” of unconventional measures along with rate cuts.
    The council continued its discussion during its May 8 meeting when Draghi took another step toward preparing markets for a move when he said the ECB council “is comfortable with acting next time,” but still wanted to wait for the latest quarterly forecasts.
    Since then the economic outlook for the euro zone has weakened and although inflation rose slightly in April, it remains far below the ECB’s objective of just under 2 percent, providing Draghi with fresh ammunition.
    Inflation in the 18-nation euro zone in April was 0.7 percent, stuck below 1.0 percent since October, and the economy expanded by only 0.2 percent in the first quarter of 2014 from the previous quarter, about half the pace economists expected.
    In its forecast from March, the ECB already trimmed its 2014 inflation forecast to 1.0 percent and even by 2016 inflation is only expected to rise to 1.5 percent, still below the ECB target. The forecast for 2014 economic growth was revised upwards to 1.2 percent but the weak first quarter may not put that into question.

    The drumbeat of speculation over the ECB’s expected response to recent data and new forecasts culminated on Wednesday.
     A report from the Reuters news agency said ECB staff has prepared a package of options for the June council meeting, including cuts in all interest rates and measures aimed at boosting lending to small and medium-sized firms, the backbone of the euro zone’s troubled economy.
    Reuters quoted sources saying that a June rate cut “is more of less a done deal,” involving cuts of 10 to 20 basis points in all rates, including the 0.25 benchmark refinancing rate and the zero percent deposit rate, which would push it into negative terrain, a first for a major central bank.
    Then on Thursday, ECB Executive Board member Yves Mersch essentially confirmed the report, telling journalists the ECB was preparing for possible deployment of more tools than “might even strike the most fertile imagination of journalists” who would get a “very precise answer” to the exact nature of these measures after the next council meeting.
    Apart from boosting growth and inflation, the ECB is hoping a round of stimulus would help take the steam out of the euro currency.
    In recent months, ECB policy makers have been unusually vocal about exchange rates, concerned that a strong euro is suppressing inflation by holding down import prices and also making euro area exports less competitive internationally.
    The single currency appears to have gained strength from a return of investors’ appetite for bonds from the euro zone periphery countries and a belief that the economy is finally turning the corner.
    Since early July 2013, the euro had been appreciating steadily from around 1.28 in against the U.S. dollar around 1.394 on the morning of May 8, a gain of almost 8 percent.
    But Draghi’s signal of likely ECB easing in June appears to have the steam out of the euro for now. On Friday the euro was quoted at 1.369, down 1.80 percent since early May 8.
    Through the first 20 weeks of this year, central banks have now cut policy rates 19 times, or 10 percent of this year’s 190 monetary policy decisions by the 90 central banks followed by Central Bank News.
    But policy rates have also been raised 17 times, or 9.0 percent, a sign that that this year’s trend toward higher rates is still intact though it has weakened in recent weeks, just as investors’ optimism over the strength of the global economy has dampened.


COUNTRY MSCI      NEW RATE            OLD RATE         1 YEAR AGO
MOZAMBIQUE 8.25% 8.25% 9.50%
ARMENIA 7.25% 7.50% 8.00%
CROATIA FM 5.00% 5.00% 6.25%
CHILE EM 4.00% 4.00% 5.00%
PAKISTAN FM 10.00% 10.00% 9.50%

    This week (Week 21) five central banks will be deciding on monetary policy, including Nigeria, Iceland, Japan, Turkey and South Africa.


NIGERIA FM 20-May 12.00% 12.00%
ICELAND 21-May 6.00% 6.00%
JAPAN DM 21-May                  N/A                  N/A
TURKEY EM 22-May 10.00% 4.50%
SOUTH AFRICA EM 22-May 5.50% 5.00%


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