Colombia cuts rate 6th time to boost economy further

     Colombia's central bank cut its benchmark interest rate for the sixth consecutive month and reiterated its message from July that the balance of risks "suggests that it is appropriate to provide an additional boost to the economy," and the impact of monetary policy will be greater as the different economic sectors are gradually opened as the pandemic allows.

     The Central Bank of Colombia (CBC) cut its benchmark interest rate by another 25 basis points to 2.0 percent and has now cut it 225 points this year following cuts in March, April, May, June and July.

      CBC's board said the decision was unanimous and took into account inflation, weak aggregate demand and spare capacity as confirmed by data for the second quarter, a deterioration of the labour market and labor income along with an improvement in financial market conditions.

     Colombia's inflation rate decelerated to a new 2020 low of 1.97 percent in July from 2.19 percent in June while inflation expectations for end-2021 at 2.87 percent and two-year expectations derived from public debt securities of 1.56 percent.

     CBC has forecast inflation this year between 1.0 and 2.0 percent, with 1.5 percent the most likely, well below its long-term target range of 3.0 percent.

     Colombia's gross domestic product contracted 15.7 percent year-on-year in the second quarter of this year after expanding 1.4 percent in the first quarter while the unemployment rate rose to 20.2 percent in July from 19.8 percent in June and compared with 10.7 percent in July 2019.

     Earlier this month CBC estimated Colombia's economy would shrink between 6.0 and 10.0 percent this year, with a 8.5 percent contraction the most likely.

     In its quarterly monetary policy report the central bank forecast growth in 2021 of between 3.0 and 8.0 percent, with 4.1 percent the most likely outcome. Inflation is expected to remain below 3.0 percent.

     Colombia's government has forecast 5.5 percent contraction this year and growth of 6.6 percent next year.

     Like most other currencies, Colombia's peso fell against the U.S. dollar in March, then rebounded through May. From mid-July to the the middle of last week it then fell again but has firmed in the wake of the U.S. Federal Reserve's more lenient approach to its inflation target and rose further today.

     The peso was trading at 3,741.3 to the dollar today, down 12.2 percent this year.

This week in monetary policy: Bulgaria, Colombia, Australia, Chile and Ukraine

    This week - August 31 through September 5 - central banks from 5 countries or jurisdictions are scheduled to decide on monetary policy: Bulgaria, Colombia, Australia, Chile and Ukraine.

     Following table includes the name of the country, the date of the next policy decision, the current policy rate, the result of the last policy decision, the change in the policy rate year to date, and the rate one year ago.

    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

WEEK 36
AUG 31 - SEP 5, 2020:
BULGARIA	31-Aug	0.00%	0	0	0.00%
COLOMBIA	31-Aug	2.25%	-25	-200	4.25%	EM
AUSTRALIA	1-Sep	0.25%	0	-50	1.00%
CHILE	1-Sep	0.50%	0	-125	2.00%	EM
UKRAINE	3-Sep	6.00%	0	-750	16.50%	FM

 

    www.CentralBankNews.info                    

Fiji maintains rate but sees significant downside risks

    Fiji's central bank left its key interest rate unchanged but turned more pessimistic about the economic outlook due to a resurgence of COVID-19 infections in Australia and New Zealand, delaying the resumption of international air travel and the "return to some form of normalcy," for tourism, its largest industry.

    The Reserve Bank of Fiji (RBF) kept its Overnight Policy Rate (OPR) at 0.25 percent, unchanged since March when it cut its rate in half in the first rate cut since November 2011.

    "The outlook for Reserve Bank's twin monetary policy objectives of low inflation and comfortable level of foreign reserves remain intact," RBF said, adding:

    "However, the persistence of the pandemic and the associated delay in the resumption of international travel is a significant downside risk to the outlook.

    The central bank said it would continue to monitor economic developments and "align monetary policy where appropriate."

    Consumption and investment in Fiji remain well below a year ago and in line with the sharpest economic contraction on record, the bank said, adding the financial sector remains stable for now.

    Liquidity in the banking system is at record highs, boosted by the government's draw down of an external loan and to ensure that businesses that are affected by the pandemic have access to cheaper credit, the Disaster Rehabilitation and Containment Facility has been further raised by $50 million to $150 million, the bank's governor Ariff Ali said in a statement.

    Fiji is continuing to experience deflation with consumer prices down 1.6 percent in July, the 10th straight month of lower consumer prices and RBF expects end-year inflation of minus 3.0 percent given subdued domestic demand and lower taxes and duties on a number of products.

     Foreign reserves remain at a comfortable level of $2.283 billion, or 8.3 months of imports, up from $2.111 billion at the end of July.

Fed to allow moderately higher inflation to meet 2% target

     The Federal Reserve acknowledged the potential growth rate of the U.S. economy has declined, the general level of global interest rates has fallen and a strong labor market has not triggered inflation, with the result it can let inflation "moderately" exceed its longer-run target of 2.0 percent.

     In a highly anticipated review of its monetary policy strategy that was first formulated in 2012, the Fed affirmed that 2 percent inflation is still consistent with meeting its mandate of  maximum employment, stable prices and moderate long-term interest rates.

     However, the harsh reality is that central banks in the U.S. and other advanced economies have struggled to raise inflation to their targets.

     "The persistent undershoot of inflation from our 2 percent longer-run objective is a cause for concern," said Fed Chair Jerome Powell in a speech accompanying the Fed's amended statement on its longer-run goals and strategy.

     Persistently low inflation then leads to a fall in longer-term inflation expectations, which then pulls actual inflation even lower in a downward spiral. 

     In turn this lowers the general level of interest rates and estimates of the neutral federal funds rate, the level that is consistent with the economy operating a full strength and stable inflation. This rate is driven by fundamental factors, such as demographics and productivity growth.

     Illustrating this, the median estimate of the neutral federal funds rate by members of the Fed's policy-making body, the Federal Open Market Committee (FOMC), has dropped to 2.5 percent from 4.25 percent in early 2012.

     "More troubling has been the decline in productivity growth, which is the primary driver of improving living standards over time," Powell said.

     The consequence is the Fed, like other central banks, have less scope to cut interest rates to boost employment and activity during economic downturns, leaving them with fewer policy tools.

     "To prevent this outcome and the adverse dynamics that could ensure, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time," Powell said, adding:

     "Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time."

     The Fed will not tie itself to a mathematical formula for determining average 2 percent inflation, but instead will use an approach that Powell described as "a flexible form of average inflation targeting."

     "Our decisions about appropriate monetary policy will continue to reflect a broad array of considerations and will not be dictated by any formula," Powell said, adding if excessive inflationary pressures were to build up or inflation expectations ratchet up, the Fed would not hesitate to act.

Iceland pauses in easing campaign after 9 rate cuts

     Iceland's central bank paused in its aggressive monetary easing cycle after 9 rate cuts in the last 16 months but said it still had "the scope to response decisively to the deteriorating economic outlook" due to more firmly anchored inflation expectations.

     The Central Bank of Iceland (CBI) left its rate on seven-day deposits at 1.0 percent after cutting it four times this year by a total of 200 basis points - most recently in May - and by 350 points after cutting it 9 times since May 2019 when the outlook for the North Atlantic island darkened.

     "Lower interest rates, together with actions taken by the Bank this spring have supported domestic demand," CBI said, adding the "impact of these measures has yet to emerge in full, however, and they will continue to support the economy and facilitate a more rapid recovery than would otherwise occur."

     Hit by a series of adverse events in 2019 - a hit to tourism from the collapse of a budget airline and the grounding of Icelandair aircraft, the failure of the capelin catch due to rising ocean temperatures and production difficulties in the aluminum industry - Iceland's economy was already slowing before the outbreak of COVID-19 early this year.

      In the first quarter of this year the country's gross domestic product shrank 7 percent from the previous quarter, or by 1.2 percent year-on-year, and CBI estimated the economy would contract nearly 11 percent year-on-year in the second quarter.

      In 2019 GDP slowed to only 1.9 percent growth from 3.8 percent in 2018.

     "Although the outlook for H2 is rather poorer than was forecast in May, GDP is expected to contract by 7.1 percent in 2020 as a whole, instead of the previously projected 8%," CBI said in its latest monetary bulletin, as household consumption didn't suffer as much as previously feared.

     Because economic developments were better than expected along with the government's support, Iceland's unemployment has not risen as much as feared and the unemployment rate this year is expected to average 7.2 percent instead of 8.7 percent as forecast in May.

     In 2021 Iceland's economic output is forecast to rise from its deep trough and expand by 3.4 percent and by the same in 2022 but first return to end-2020 level in late 2023. 

     In May CBI had forecast 2021 growth of 4.8 percent and then 2.8 percent in 2022.

     After hitting a low of 1.7 percent in January, Iceland's inflation rate has been accelerating to 3.0 percent in July - driven by a depreciation of the Icelandic krona - and is expected to average around 3.0 percent for the rest of this year, with medium and long-term inflation expectations anchored around the bank's inflation target of 2.5 percent.

     But with significant slack in the domestic economy and weak global inflation, inflation is forecast to taper off next year and average 2.4 percent after 2.6 percent this year and then to 1.9 percent in 2022.

     After rising in the three years from May 2015, Iceland's krona began depreciating in April 2018 and was also hit sharply in March, as most other currencies, as the pandemic-crises hit the global economy.

     Today the krona was trading at 138.4 to the U.S. dollar, down 12.4 percent this year.

Kyrgyzstan holds rate to keep stimulus of weak economy

     Kyrgyzstan's central bank, one of only a handful of central banks to have raised rates this year, again left its rate steady to maintain stimulus of economic activity, adding the return of global economic growth to pre-crises levels is expected to take longer than previously expected.

     The National Bank of the Kyrgyz Republic (NBKR) kept its discount rate at 5.0 percent, unchanged since it was raised in February by 75 basis points to dampen inflationary pressure.

     The central bank said the country's economy was still largely influenced by external conditions and measures to counter the spread of the COVID-19 pandemic, which resulted in a sharp decline in the country's economy except for the agricultural sector and the Kumtor gold mine.

     Economic activity in Kyrgyzstan remains in the negative zone and remittances from workers abroad are still below last year, reducing domestic consumption, NBKR said, adding inflation also remains in a downward trend amid disinflationary factors.

     Kyrgyzstan's inflation rate decelerated to 5.3 percent in July and to 4.9 percent as of Aug. 14 after reaching a peak of 8.6 percent in April due to weak domestic demand, high supply of seasonal agricultural goods and a stabilization of the som's exchange rate, the bank added.

    NBKR expects inflation to average between 5.0 to 7.0 percent by the end of its year, in its target zone.

    After plunging some 18 percent from mid-March to early April, the Kyrgyzstani som then rebounded by early June, helped by intervention by the central bank.

     Since the start of this month the som has been more stable though it has still depreciated and was trading at 77.9 to the U.S. dollar today, up 9 percent since lows of just above 85 in early April, but still down 10.5 percent since the start of this year.

     NBKR is in the process of transitioning to an inflation targeting monetary framework.

     www.CentralBankNews.info

Paraguay maintains rate for 2nd month to aid recovery

     Paraguay's central bank left its policy rate steady for the second month, saying an accommodative monetary policy is appropriate to provide further momentum for a recovery of domestic demand and ensure inflation converges to its 4.0 percent target.

     The Central Bank of Paraguay (BCP) has cut its policy rate five times this year by a total of 325 basis points, most recently in June, but has kept its steady at 0.75 percent since July.

     While short-term economic data on the international front have some some improvement after significant falls earlier, the situation in South America continues to be "complex," the bank said, adding this is the reason for a poor economic outlook.

     Domestic economic activity showed a good performance in June, helped by an improvement in manufacturing, construction and livestock but there is a downward risk to economic activity and demand in coming months due to an increase in the rate of COVID-19 contagion.

      Paraguay's gross domestic product grew an unchanged 3.5 percent year-on-year in the first quarter of this year while inflation rose to 1.1 percent in July from 0.5 percent in June.

      Last month BCP forecast the country's economy could shrink 3.5 percent this year, up from an earlier forecast of a 2.5 percent contraction.

This week in monetary policy: Israel, Paraguay, Kyrgyzstan, Hungary, Iceland, Guatemala, Fiji, South Korea plus virtual Jackson Hole

     This week - August 23 through August 29 - central banks from 8 countries or jurisdictions are scheduled to decide on monetary policy: Israel, Paraguay, Kyrgyz Republic, Hungary, Iceland, Guatemala, Fiji and South Korea.

     In addition to these decisions by monetary policy committees, the Federal Reserve Bank of Kansas City holds its annual Jackson Hole symposium on Aug. 27 and 28 under the theme of "Navigating the Decade Ahead: Implications for Monetary Policy."

     But for the first time since its beginning in 1982, the symposium will be online and a speech by Jerome Powell, chairman of the U.S. Federal Reserve, on Aug. 27 will be live-streamed at 09:10 EST or 1:10 PM UTC

     Economists are looking for Powell, whose speech is titled "Monetary Policy Framework Review," to learn if the Fed in the future be more relaxed about reaching its 2.0 percent inflation target from 2012.
     Following table includes the name of the country, the date of the next policy decision, the current policy rate, the result of the last policy decision, the change in the policy rate year to date, and the rate one year ago.
    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

WEEK 35
AUG 23 - AUG 29, 2020:
ISRAEL	24-Aug	0.10%	0	-15	0.25%	DM
PARAGUAY	24-Aug	0.75%	-50	-325	4.25%
KYRGYZSTAN	24-Aug	5.00%	0	75	4.25%
HUNGARY	25-Aug	0.60%	-15	-30	0.90%	EM
ICELAND	26-Aug	1.00%	-75	-200	3.50%
GUATEMALA	26-Aug	1.75%	-25	-100	2.75%
FIJI	27-Aug	0.25%	0	-25	0.50%
SOUTH KOREA	27-Aug	0.50%	0	-75	1.50%	EM

 
    www.CentralBankNews.info

Mozambique holds rate after 13 cuts, inflation seen rising

     Mozambique's central bank left its benchmark interest rate steady after 13 rate cuts in 3-1/2 years, citing a worsening of inflation prospects, a greater contraction of economic activity this year and a slower recovery in 2021.
    The Bank of Mozambique (BOM) kept its monetary policy rate (MIMO) at 10.25 percent after cutting it twice this year by a total of 250 basis points and after cutting it 13 times since April 2017 by a total of 11.50 percentage points.

     Mozambique's inflation rate rose slightly to 2.8 percent in July from 2.69 percent in June and BOM said it expects an acceleration in the short and medium term due to a depreciation of the metical and the recovery of oil prices despite weak domestic demand.

     Nevertheless, economic agents surveyed in August still only expect inflation in single digits, it added.

     After being relatively stable between June 2017 and the start of this year, the metical has depreciated steadily every month this year and was trading around 71 to the U.S. dollar today, down 13.3 percent since the start of this year.

      Mozambique's economy shrank by an annual 3.25 percent in the second quarter of this year after growth of 1.68 percent in the first quarter and BOM said it now expects a greater contraction this year than earlier expected and a more timid recovery next year.

     "In the short and medium term, the risks and uncertainties in the domestic economy have increased," BOM said, referring to the spread of the COVID-19 virus and an intensification of the military instability in the north of the country.

     Despite the August 2019 peace agreement between Mozambique's government and the leader of its main opposition group, which ended sporadic violence that dragged on since a civil war ended in 1992, there is continued fighting close to Mozambique's northern border with Tanzania.

     Last week the northern port town of Mocimboa da Praia, in the province of Cabo Delgado, was again attacked by members of an Islamic state affiliated group. The town is near offshore gas projects operated by Exxon and Total worth some $60 billion.

     www.CentralBankNews.info

   

Turkey holds rate for 3rd time, withdraws more liquidity

     Turkey's central bank left its key interest rate steady for the third time, confirming its view the economic recovery is gaining pace and as part of a normalization of policy it would again raise reserve requirements so all the liquidity that was injected in March is now withdrawn.

     The Central Bank of the Republic of Turkey (CBRT) kept its policy rate, the one-week repo rate, at 8.25 percent, unchanged since May when it cut its rate after five cuts in 2020 totaling 375 basis points.

     In June the central bank then kept the rate steady, wrapping up a 9-time rate cutting spree begun in July 2019 that totaled 15.75 percentage points, and also left the rate steady in July, noting the economic recovery was gaining pace. 

      On July 18 CBRT then raised the reserve requirement on all foreign currency deposits, regardless of maturity, by 300 basis points in the first step toward rolling back some of the 500 point cut in requirements on March 17 at the height of the pandemic-induced financial shock.

      The July hike in the reserve ratio withdrew an estimated US$9.2 billion of FX and gold liquidity as part of total injection of US$14.3 billion to financial markets in March from the cut to reserve requirements and liquidity injections.

      Today CBRT said it would raise the FX reserve requirement for all maturities by another 200 basis points, completing the rollback of the March cut, and also raise the reserve requirement for precious metals deposit by 700 points.

      In addition, CBRT will raise the reserve requirement on Turkish lira deposits with maturities up to 6 months by 200 basis points and by 150 basis points for maturities of up to 3 years.

     "Thus, with the revision made on 18 July 2020 and this current arrangement, USD17.7 billion of FX and gold liquidity, which has been injected  into the market since 17 March due to the reduction of FX reserve requirement ratios and the fulfillment of real credit growth conditions by some banks for the first time, will be full withdrawn as part of the normalization," CBRT said.

      The hike in reserve requirements follows several moves by the central bank this month to tighten its policy stance without raising its key interest rate, something that would put the current governor on a collision course with Turkey's president, Recep Tayyip Erdogan, who last year fired the previous governor for not lowering rates.

     On Aug. 11 CBRT reduced to zero the cheap liquidity it provides to primary dealers as part of its open market operations, days after it suspended one-week repo auctions, forcing lenders to meet funding needs through the overnight window at 9.75 percent.

      Turkey's lira, which fell sharply to new record lows earlier this month, eased slightly in the wake of today's decision to trade at 7.34 to the U.S. dollar but remains up from the record low of 7.39 that it hit earlier this week, but still down almost 19 percent since the start of this year.

     Although global economic activity has shown signs of a partial recovery in the third quarter of this year, the central bank said uncertainty remains high and both advanced and emerging economies are maintain expansionary monetary and fiscal stances.

     While commercial loans have started to normalize, consumer loans remain strong, tourism revenues have partially improved due to an easing of travel restrictions, while a recovery of exports, low commodity prices and the exchange rate will support the current account balance, CBRT said.

     Core inflation is starting to trend higher due to a rise in pandemic-related costs and changes in the exchange rate and credit is now retaining disinflationary effects from the demand side while there are still significant uncertainties about domestic and external demand, it added in explaining its decision to keep the policy rate unchanged.

     As in recent months, the central bank said "keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance" and underlying inflation will determine the future stance.

Namibia cuts rate 5th time as economy shrinks

    Namibia's central bank cut its benchmark interest rate for the 5th time this year as economic activity has contracted severely, credit growth has slowed and inflation remains at historic lows.

    Bank of Namibia (BON) lowered its repo rate by another 25 basis points to 3.75 percent and has now cut it by 275 points this year, still less than South Africa's rate total rate cuts of 300 points following the South African Reserve Bank's latest cut in July.

     "The MPC (monetary policy committee) is of the view that at 3.75 percent, the repo rate is appropriate to support domestic economic active while at the same time safeguarding the one-to-one link between the Namibia dollar and the South African rand," the central bank said, adding:

     "The MPC had to balance the need for further monetary stimulus in the face of the COVID-19 pandemic-induced weakness of the economy, against the importance to not undermine sound saving and investment decisions in the economy."

     As of July 31, Namibia's stock of international reserves rose to N$35.4 billion from N$33.7 billion at the end of June, enough to cover 5.3 month of imports.

     Namibia's gross domestic product shrank 2.59 percent in the first quarter from the previous quarter for a year-on-year decline of 0.8 percent and the central bank forecast a contraction of 7.8 percent this year before recovering a moderate 2.1 percent in 2021.

     "The slump was reflected in sectors such as mining, agriculture, manufacturing, construction, tourism, wholesale and retain trade as well as transport and storage," BON said, adding local electricity generation and telecommunications had showed some improvement from last year.

     Namibia's inflation rate was steady at 2.1 percent in July, June and May for an average of 2.1 percent in the first seven months of this year, down from 4.3 percent in the same 2019 period.

     BON projected average inflation this year of around 2 percent.

     Average growth in private sector credit expansion declined to 4.7 percent in the first six months of this year, down from 6.9 percent in the same period of last year, as growth of credit to businesses only grew 2.2 percent in that period, the bank said.

     www.CentralBankNews.info

    

Zambia cuts rate 2nd time in 2020 despite high inflation

     Zambia's central bank lowered its policy rate for the second time this year as it expects inflation to steadily decline over the next two years due to better food supply and weak economic growth after remaining above its target range in the short term.
     The Bank of Zambia (BOZ) cut its policy rate by a further 125 basis points to 8.0 percent and has now cut it 350 points this year following a cut in May this year when the central bank reversed course after raising its rate twice in 2019 to rein in rising inflation from a falling exchange rate.
     "Decisions on the policy rate will continue to be guided by inflation forecasts, outcomes, and identified risks, including those associated with the COVID-19 pandemic," BOZ said in a statement by the bank's monetary policy committee.

     Zambia's inflation rate was largely steady at 15.8 percent in July from 15.9 percent in June, but below 16.6 percent in May. Inflation has been pushed up by a fall in the kwacha and higher food prices.

     In the first quarter average food inflation rose by 1.4 percentage points to 16.9 percent while non-food inflation rose 3.9 points to 15.1 percent.

     "Although projected to remain above the upper bound of the 6-8% medium-term target range, inflation is expected to steadily decline, reaching the upper bound by the end of the forecast horizon," BOZ said, attributing this decline to more moderate food prices from a significant improvement in supply, especially of maize.

      But inflation is still expected to be under upward pressure from the exchange rate and interest rate expectations due to the higher fiscal deficit and a weaker global economy.

      Zambia's economy slowed in the second half of last year and BOZ raised its forecast for a contraction of 4.2 percent this year, higher than a contraction of 2.6 percent previously expected, and compared with estimated growth of 1.4 percent in 2019.

     "The substantial decline in consumer and investment spending due to disruptions in business operations are expected to continue to constrain economic growth," the bank said, adding the most adversely affected sectors are tourism, wholesale and retail trade, and construction.

     The kwacha has been weakening since September 2018 but it tumbled some 17 percent in March due to the outbreak of the pandemic, compounding concern over the country's high debt service as the virus is expected to boost fiscal deficit and drain its international reserves.

     Since April the kwacha has been more stable though it has slipped a bit since early July. Today the kwacha was trading at 18.82 to the U.S. dollar, down 25.3 percent this year.

     "Consistent with its policy objective of allowing the exchange rate to adjust to market conditions, the Bank of Zambia has continued to provide measured support to the market," BOZ said.

     www.CentralBankNews.info

Jamaica maintains rate as inflation forecast revised up

    Jamaica's central bank keeps its key interest rate steady, saying this reflects its view that inflation is expected to be slightly higher than it forecast in May though still within its target.
    The Bank of Jamaica (BOJ) held its policy interest rate at 0.50 percent, unchanged since it was cut by 25 basis points in August last year.

    BOJ said it now expects inflation to average 4.6 percent over the next 8 quarters, up from the May forecast of an average of 4.4 percent. 

    BOJ targets inflation of 4.0 to 6.0 percent.

    This revised outlook is mainly due to higher agricultural and processed food prices, higher energy costs and an increase in some regulated prices.

     Further details will be released at BOJ's monetary policy briefing on Aug. 26, BOJ said.

     In May BOJ also forecast that Jamaica's gross domestic product would contract by an average 5.1 percent in the current fiscal year, which began April 1, and then recovery in fiscal 2021/22 with growth ranging from 2.5 to 5.5 percent.

     Jamaica's inflation rate jumped to 6.8 percent in June from 5.2 percent in May, GDP shrank by an annual 2.3 percent in the first quarter after zero growth in the previous quarter.

This week in monetary policy: Congo cuts, Jamaica, Indonesia, Zambia, Namibia, China, Philippines, Sri Lanka, Norway, Turkey, Botswana & Mozambique

     This week - August 10 through August 15 - central banks from 11 countries or jurisdictions are scheduled to decide on monetary policy: Jamaica, Indonesia, Zambia, Namibia, China, Philippines, Sri Lanka, Norway, Turkey, Botswana and Mozambique.
     The table below includes the Central Bank of Congo's (CBC) monetary policy decision on Friday, Aug. 14, to hike its policy rate by 1,100 basis points to 18.50 percent in light of a jump in inflation to 15.90 percent in June while the contraction in economic activity has been less severe than initially estimated.
     Based on data by the end of June, CBC forecast economic contraction of 1.7 percent this year compared with the March forecast of 2.4 percent. The Congolese franc was trading at 1,960 to the U.S. dollar today, down 3.2 percent since the beginning of July and down 14 percent this year.
     On Friday, Aug. 14, the Bank of Jamaica (BOJ) temporarily closed its main building in downtown Kingston out of "an abundance of caution" as the bank's premises may have been compromised by someone who may have been exposed to the COVID-19 virus. 
     No bank staff tested positive and BOJ's website still listed the next monetary policy decision as Aug. 18.
     Exactly a year ago, the People's Bank of China (PBOC) adopted the Loan Prime Rate (LPR) as its new benchmark lending rate instead of the one-year lending rate and also changed its method for calculating LPR so it was more representative of actual lending rates. Since then, LPR has been announced on the 20th of each month.
     Following table includes the name of the country, the date of the next policy decision, the current policy rate, the result of the last policy decision, the change in the policy rate year to date, and the rate one year ago.
    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

WEEK 34
AUG 17 - AUG 22, 2020:
DEM. CONGO	14-Aug	18.50%	1,100	950	9.00%
JAMAICA	18-Aug	0.50%	0	0	0.50%
INDONESIA	19-Aug	4.00%	-25	-100	5.50%	EM
ZAMBIA	19-Aug	4.50%	0	-50	5.00%
NAMIBIA	19-Aug	4.00%	-25	-250	6.50%
CHINA	20-Aug	3.85%	0	-30	4.25%	EM
PHILIPPINES	20-Aug	2.25%	-50	-175	4.25%	EM
SRI LANKA	20-Aug	4.50%	-100	-250	7.00%
NORWAY	20-Aug	0.00%	0	-150	1.25%	DM
TURKEY	20-Aug	8.25%	0	-375	19.75%	EM
BOTSWANA	20-Aug	4.25%	0	-50	4.75%
MOZAMBIQUE	20-Aug	10.25%	-100	-250	12.75%

    www.CentralBankNews.info

Mexico cuts rate 10th time as inflation ticks higher

    Mexico's central bank lowered its policy rate for the 6th time this year and for the 10th time in a row, adding future policy decisions would be consistent with an "orderly and sustained" convergence of inflation to its target in light of the large impact on productive activity and the evolution of the financial shock the country is experiencing.

     The Bank of Mexico, known as Banxico, cut its target for the overnight interbank interest rate by another 50 basis points to 4.50 percent and has now cut it 275 basis points this year following cuts in February, March, April, May and June.

     Since August 2019, when the central bank began unwinding 500-basis-points of rate hikes in the three years from December 2015 to December 2018, the rate has been cut by 375 points.

     Unlike the governing board's unanimous decision in June, one member today voted to cut the rate by only 25 basis points to 4.75 percent. Today's rate cut was widely expected.

     "Looking ahead, the available room for maneuver will depend on the evolution of the factors that have an incidence on the outlook for inflation and its expectations, including the effects that the pandemic might have on both factors," Banxico said.

      Mexico's inflation rate rose for the fourth month to 3.62 percent in July from 3.33 percent in June due to higher energy prices. 

     While expectations for headline inflation for the end of the year also rose, the central bank said medium and long-term expectations remain relatively stable, albeit above the bank's 3.0 percent target.

     Mexico's economy has been in recession since 2019 and in the second quarter gross domestic product shrank by 18.9 percent year-on-year after a 1.4 percent contraction in the first quarter.

     Data shows a recovery of activity in June in response to the opening of some of the economy and an easing of restrictions along with a moderate recovery of external demand.

     But uncertainty still prevails and Banxico expects the economic slack to continue along with significant risks to the downside.

Rwanda maintains rate as inflation seen decelerating

    Rwanda's central bank left its benchmark interest rate steady at 4.50 percent, saying it was maintaining an accommodative monetary policy stance to support commercial banks to continue financing businesses and households considering that inflation is projected to decelerate in the last quarter of this year.

    The National Bank of Rwanda (NBR) has only cut its rate twice since December 2017, first in May 2019 and then in April this year, both times by 50 basis points.

     In a statement following a quarterly meeting by its monetary policy committee on Aug. 12, the bank noted economic growth in the first quarter eased to 3.6 percent compared with 6.1 percent in the first quarter of 2019 and 8.4 percent in the fourth quarter of 2019, and high-frequency indicators point to a negative impact of COVID-19 pandemic in the second quarter.

     NBR's composite index of economic activities (CIEA) fell 8.8 percent in the second quarter compared with a rise of 16.5 percent in the same quarter last year but then rose 8.4 percent in June as the economy opens up and economic activities begin to pick up.

     The economy is expected to improve in the second half of this year, supported by a further opening of Rwanda's and other economies across the world, the central bank said.

     Rwanda's inflation rate averaged 8.7 percent in the second quarter, up from 8.2 percent in the first quarter, due to higher public transport prices.

     But NBR said headline inflation is projected to start slowing to below its target of 5.0 percent in the last quarter of 2020 but still raised its forecast for average inflation this year to 6.9 percent from 6.0 percent projected in April due to the rise in transport prices. 

     The exchange rate of Rwanda's franc has depreciated by 2.3 percent against the U.S. dollar by the end of July, slightly down from a 2.6 percent decline in the same period last year and NBR expects the exchange rate to remain stable, with adequate reserves covering 6.3 months of imports.

     In June the International Monetary Fund's executive board approved the disbursement of another $111.06 million under its rapid credit facility to Rwanda, the IMF's second emergency disbursement following $109.4 million in April.

     In its statement, the IMF said Rwanda's economic outlook had worsened since April and lowered its growth forecast for 2020 to 2.0 percent from an earlier 5.1 percent "due to the deepening of the COVID-19 impact."

 

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Belarus holds rate as FX market prevents further easing

     The central bank of Belarus left its benchmark interest rate steady but said continued moderate easing of its policy stance was called for by lower-than-expected inflation but the current situation in the foreign exchange markets with heightened devaluation expectations did not allow for such a move today.

     "To maintain financial stability, it is important to maintain the propensity to save in local currency," Pavel Kallaur, chairman of the National Bank of the Republic of Belarus (NBRB) said in a statement, adding there was a risk of increased volatility in the global commodity and financial markets that could lead to higher price fluctuations for imported goods.

     In addition to leaving its refinancing rate at 7.75 percent, the bank's board decided to hold an additional monetary policy meeting on Oct. 14, ahead of the previously scheduled meeting on Nov. 11.

     NBRB last cut its key interest at an extraordinary board meeting on June 22 after the country's president, Alexander Lukashenko, asked the bank to look into lowering the rate.

     NBRB has cut its rate three times this year by a total of 125 basis points and 19 times since April 2016 by a total of 17.25 percentage points.

     Today's policy decision comes after Lukashenko, who has ruled Belarus since 1994, was re-elected on Sunday in a disputed election that triggered the largest protests in a decade. 

     Today, Reuters reported police had fired live rounds at protesters in the city of Brest and arrested more than 1,000 people nationwide, intensifying a crackdown that has prompted the European Union to weigh new sanctions on the country after lifting them in 2016.

     The Belarus ruble weakened this week and hit 2.48 to the U.S. dollar earlier today, down 1.6 percent since the start of August, but firmed following the central bank's decision to trade at 2.46, still down 14.6 percent since the start of the year.

     The people are accumulating their savings "in an unorganized form" and in foreign currency, with bank deposits down, Kallaur said, adding they are increasingly net buyers of foreign currency, indicating a surge in devaluation expectations.

     However, he considered this a temporary situation.

     Headline inflation in Belarus was steady at 5.2 percent in July and June, below the bank's forecast from May, and is forecast to be in a range of 5.0 to 5.3 percent until the end of the year.

     Economic activity declined in the second quarter due to lower external demand and trade, a deterioration in companies' financial conditions and domestic demand, Kallaur said.

     Belarus' gross domestic product contracted by 0.3 percent in the first quarter from the same quarter last year.

      In January the central bank and government adopted a major strategy to improve trust in the Belarusian ruble, which was introduced in July 2016, and reduce reliance of foreign currency in domestic transactions.

     Some 97 percent of the government's debt is denominated in foreign currency and the strategy includes a full transition to inflation targeting by 2021.

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New Zealand holds rate but boosts QE for 2nd time

     New Zealand's central bank left its key interest rate steady but expanded its asset purchases for the second time to lower retail interest further, citing the risk that persistent low inflation and employment will become embedded in expectations and thus create the need for more monetary stimulus than otherwise.

     The Reserve Bank of New Zealand (RBNZ) left its Official Cash Rate (OCR) at a record low 0.25 percent, unchanged since it slashed it by 75 basis points in March, but increased its Large Scale Asset Purchase (LSAP) program by up to $100 billion from $60 billion.

     RBNZ initially launched its asset purchase program, known as quantitative easing, on March 23 with $33 billion, a week after cutting OCR to the current level, and then boosted it to $60 billion in May.

     At its last monetary policy meeting in June the central bank said it was prepared to expand LSAP and was also continuing to prepare for the use of additional monetary policy tools if needed.

     Today RBNZ said it was still actively preparing for additional monetary stimulus, with its use dependent on the outlook for inflation and employment. 

     These additional tools include lowering OCR into negative territory, supported by funding retail banks directly at near-OCR, complemented by a funding for lending program, or buying foreign assets.

      Explaining why the central bank boosted its purchases of bonds further, RBNZ said the market for bonds had expanded following the government's issue of debt so the central bank could purchase even more than previously without affecting the functioning of the market.

      "The Monetary Policy Committee will provide additional stimulus as necessary to meet its remit," RBNZ said, the same day the country imposed a 3-day lockdown on Auckland after four new cases of COVID-19, ending a 102-day streak without a local infection.

     Inflation eased to 1.5 percent in the second quarter from 2.5 percent in the previous quarter while the unemployment rate also declined to 4.0 percent from 4.2 percent. RBNZ's mandate is to stabilize inflation near its maximum sustainable level and keep inflation at 2.0 percent.

      Under its baseline scenario, RBNZ sees inflation averaging 2.5 percent this year but then decelerating to 0.4 percent in 2021, 0.8 percent in 2022 and 1.5 percent in 2023 while the unemployment rate is seen averaging 4.2 percent this year before rising to 8.0 percent in 2021, 6.6 percent in 2022 and 5.9 percent in 2023.

      Gross domestic product is forecast to contract 6.1 percent for the March year 2021, down from growth of 1.5 percent in 2020, then rebound and grow 6.7 percent in 2022 and 3.3 percent in 2023.

      In the first quarter of this year New Zealand's GDP shrank 1.6 percent from the previous quarter for an annual fall of 0.2 percent.

      OCR is seen unchanged for the next 12 months.

Uganda maintains rate as risks of inflation now to upside

     Uganda's central bank left its benchmark interest rate steady after three cuts, saying the risks of inflation rising above its target are now to the upside despite economic growth being below its potential level.

      The Bank of Uganda (BOU) kept its Central Bank Rate (CBR) at 7.0 percent after cutting it by 200 basis points this year following cuts in April and June. Since it began easing in October 2019, the rate has been cut 300 points.

      BOU's monetary policy committee also kept the discount rate at 10 percent and the bank rate at 11 percent, adding it remains committing to providing liquidity support to supervised financial institutions (SFIs).

      The central bank emphasized its primary mandate is to keep inflation around its medium-term target of 5.0 percent while the current outlook is characterized by "extreme uncertainty," contingent upon the intensity, spread and duration of the COVID-19 pandemic.

     "In these conditions, supporting the recovery of the economy is overriding in the conduct of monetary policy provided inflation remains in the range of 5 percentage points," BOU said.

     Uganda's headline inflation rate rose to 4.7 percent in July from 4.1 percent in June while core inflation rose to 5.8 percent from 4.9 percent, topping the bank's target.

      Over the next 12 months, the path for consumer price inflation will largely reflect the influence of containment measures and higher prices of imported consumer goods due to taxes to support import substitution.

      Core inflation is expected to peak at 6.1 percent in the first quarter of 2021 while headline inflation could peak at 6.2 percent, BOU said, adding risks to the inflation outlook include a higher fiscal deficit, and more depreciated exchange rate.

      But domestic demand could also take longer to recover, and food prices and external sources of inflation are likely to remain weak amid the global economic downturn.

      After growth slowed in the first quarter of this year to annual growth of 1.8 percent from 6.7 percent in the previous quarter, BOU estimated the economy contracted by 3.2 percent in the second quarter due to a combination of containment measures and floods.

     "As the easing of the lockdown continues, the economy is expected to slowly recovery, reflecting the effects of a slow rebound in both foreign and domestic demand and, subdued confidence on the part of households and firms," BOU said.

      Many consumers are also expected to remain hesitant to resume their previous spending patterns, partly due to fears of contracting the virus and uncertainty about earnings while low exports and subdued tourism will continue to weigh on economic growth.

     BOU forecast growth in the 2020/21 financial year, which began July 1, in a range of 3.0 to 4.0 percent and then 5.0 to 6.0 percent in 2021/22, remaining below potential until 2022/23.

This week in monetary policy: New Zealand, Rwanda, Belarus, Serbia, Uganda, Egypt, Mexico & Peru

    This week - August 9 through August 15 - central banks from 8 countries or jurisdictions are scheduled to decide on monetary policy: New Zealand, Rwanda, Belarus, Serbia, Uganda, Egypt, Mexico and Peru.

    Following table includes the name of the country, the date of the next policy decision, the current policy rate, the result of the last policy decision, the change in the policy rate year to date, and the rate one year ago.

    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

WEEK 33
AUG 9 - AUG 15, 2020:
NEW ZEALAND	12-Aug	0.25%	0	-75	1.00%	DM
RWANDA	12-Aug	4.50%	-50	-50	5.00%
BELARUS	12-Aug	7.75%	-25	-125	9.50%
SERBIA	13-Aug	1.25%	0	-100	2.50%	FM
UGANDA	13-Aug	7.00%	-100	-200	10.00%
EGYPT	13-Aug	9.25%	0	-300	14.25%	EM
MEXICO	13-Aug	5.00%	-50	-225	8.00%	EM
PERU	13-Aug	0.25%	0	-200	2.50%	EM

 

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