Dominican Rep. holds rate 4th time, sees 6% growth 2021

     The central bank of the Dominican Republic maintained its key interest rate for the fourth month in a row and while it reiterated inflation temporarily will exceed its target, it also forecast economic growth in 2021 will exceed its potential and output should rise around 6.0 percent.

     The Central Bank of the Dominican Republic (BCRD) left its monetary policy rate at 3.0 percent, unchanged since Aug. 31 when the rate was cut for the second time this year following a cut in March.
     The two cuts this year total 150 basis points and follow three rate cuts in 2019 in July, August and September.

     Since the July rate cut, which was decided on June 30, 2019, the policy rate has been cut by a total of 250 basis points.

     Inflation in the Dominican Republic has been rising for the last six months and rose to 5.26 percent in November, above the central bank's target range of 4.0 percent, plus/minus 1 percentage point.

     BCRD attributed the rise to a rise in food costs due to the delayed impact of the drought at the start of the year, from two storms, and higher cost of imports, freight and transportation costs.

     Looking ahead, the central bank forecast inflation would temporarily top its target range in the first months of 2021 and then converge to the center of its target range.

     BCRC added it still has room to maintain favorable monetary conditions to support economic activity as inflation expectations remain anchored to the midpoint of its inflation target.

     The economy of the Dominican Republic is continuing to recover, with the monthly economic activity index showing minus 3.4 percent in November, sharply up from minus 29.8 seen in April.

     This means the accumulated growth rate in the first 11 months was minus 7.3 percent, the bank said, adding its forecast show that economic activity will continue to strengthen progressively and growth in 2021 could be around 6.0 percent, supported by monetary and fiscal policies.

     The Dominican Republic's gross domestic product shrank an annual 16.9 percent in the second quarter of this year after zero growth in the first quarter.

      Due to the rate cuts, the weighted average lending rate of banks in the Dominican Republic has declined to around 9.8 percent in December from 13.3 percent t in March, private credit in pesos has expanded around 9.0 percent by the end of December while there has also been a positive trend in tax collections and foreign direct investment is projected to reach some US$2.5 billion in 2020, close to the average of the last  decade.

     At the same time, the central bank said international reserves have risen to US$10.62 billion by the end  of 2020, the highest level ever recorded, the equivalent of 13.5 percent of GDP or some 6-1/2 months of imports.

     www.CentralBankNews.info

This week in monetary policy: Trinidad & Tobago, Bulgaria and Dominican Republic

    This week - December 28 through January 2 - central banks from three countries or jurisdictions are scheduled to decide on monetary policy: Trinidad and Tobago, Bulgaria and Dominican Republic.

     Following table includes the name of the country, the date of the next policy decision, the current policy rate, the local time a policy decision is announced, 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 be accessed by clicking on This Week.

 

WEEK 53
DEC 28 - JAN 2, 2021:
TRINIDAD & TOBAGO	30-Dec	3.50%		0	-150	5.00%
BULGARIA	31-Dec	0.00%		0	0	0.00%
DOMINICAN REP.	31-Dec	3.00%		0	-150	4.50%

 

    www.CentralBankNews.info

Egypt leaves rates on hold and lowers inflation target

     Egypt's central bank left its key interest rates on hold after cutting them three times this year, most recently in November, saying this decision was consistent with achieving its new and lower inflation target for the end of 2022.
     The Central Bank of Egypt (CBE) kept its overnight deposit rate, the overnight lending rate and the rate on its main operation unchanged at 8.25 percent, 9.25 percent, and 8.75 percent, respectively, along with the discount rate at 8.75 percent.
     CBE has already cut its interest rates three times this year by a total of 400 basis points following cuts in March, September and November. 
     Since February 2018, when CBE began its monetary easing cycle in response to decelerating inflation, the key interest rates have been cut by a total of 10 percentage points.

     Egypt's inflation rate has been trending lower since hitting 33 percent in July 2017 though it has ticked up in recent months to 5.7 percent in November, the third month of acceleration, pushed up by what CBE said was a higher prices on some food items, for example tomatoes.

     But annual core inflation only rose to 4.0 percent in November from 3.9 percent and CBE said headline inflation is increasingly likely to fall below the lower bound of its target range of 6.0 percent.

     The central bank lowered its inflation target to 7.0 percent, plus/minus 2 percentage points, on average during the fourth quarter of 2022, down from its previous target of 9.0 percent, plus/minus 3 percentage points.

     Inflation targets are used by central banks to anchor inflation expectations and CBE noted exogenous shocks outside the scope of monetary policy may lead to transitory deviations of inflation from the target.

     Egypt's economy was hit hard by the Arab Spring in 2011 as it scared off foreign tourists and investors, resulting in a persistent shortage of foreign currency and declining foreign exchange reserves, which then made it increasingly difficult for the central bank to defend the value of the pound.

     A new central bank governor, Tarek Amer, took over CBE in November 2015and quickly began a major overhaul of the bank's policy by devaluing the pound by 12 percent in March 2016 and reforming the foreign exchange market to preserve U.S. dollars and attract funds from abroad.

      Later that year Egypt and the International Monetary Fund (IMF) reached a deal to shore up the government's reform program aimed a boosting economic growth and improving the fiscal situation.

     As part of a $12 billion agreement with the IMF, the pound was floated in November 2016 and immediately lost half of its value, boosting inflation and triggering rate hikes to curb inflation.

     But since December 2016 Egypt's pound has steadily appreciated though it fell sharply in March this year as most other currencies worldwide, during the COVID-19 crises. 

     Today the pound is trading at 15.69 to the dollar, up 2.3 percent since the start of this year.

     As other countries, Egypt's economy was hit by the pandemic and in June the IMF approved a US$5.2 billion loan to help it meet its balance of payment needs and the budget deficit.

      After shrinking by an annual 1.7 percent in the second quarter, Egypt's economy bounced back and expanded by a 0.7 percent in the third quarter, the bank said, adding the unemployment rate had declined to 7.3 percent, the lowest on record, down from 9.6 percent in the second quarter.

     "Most demand side leading indicators for October and November 2020 show continued signs of recovery after displaying weakness during 2020 Q2," CBE said.

     In the last financial year 2019/20, which ended June 30, Egypt's economy slowed to growth of 3.6 percent from 5.6 percent the previous year.

Turkey raises rate 3rd time to eliminate risks to inflation

       Turkey's central bank raised its policy interest rate for the third time this year, and for the second time under its new governor, in what it said was a "strong monetary tightening" to eliminate the risks to the outlook for inflation and reiterated it would "decisively" maintain tight monetary policy until there is a permanent fall in inflation.
      The Central Bank of the Republic of Turkey (CBRT) raised its one-week repo auction rate by another 200 basis points to 17 percent and has now raised it by 825 points following a first hike in September and then a second hike in November after the new governor, Naci Agbal, was installed by Turkey's strong-willed president, Tayyip Erdogan.

     "Domestic demand conditions, cumulative cost effects, in particular the exchange rat effects, increasing international food and other commodity prices and deterioration in inflation expectations continue to affect the pricing behavior and inflation outlook adversely," CBRT's monetary policy committee (MPC) said, adding:

     "Accordingly, the MPC, taking into account the end-2021 forecast target, has decided to implement a strong monetary tightening, in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process as soon as possible."

     Agbal, the central bank's fourth governor in five years, took over from Murat Uysal who was fired by Erdogan on Nov. 6. Two days later,  on Nov. 8, Berat Albayrak, Erdogan's son-in-law, resigned as finance minister, in another manifestation of the change in Turkey's economic leadership.
      While CBRT was widely expected to continue tightening its monetary policy following last week's briefing by its governor,  the hike was stronger than most economists had forecast. The average of polls had settled on a 150 basis point hike, within a range of 75 to 200 points.
      The three rate hikes have more than erased the central bank's five rate cuts from January to May, with the one-week repo rate now 5 percentage points above its level at the start of the year and the highest since  September 2019 when the central bank was in the midst of an easing campaign that began in July and continued through the COVID-19 crises at the start of the year until May when it stabilized for a few months at 8.25 percent before the shift in policy in September.

      Despite the three rate hikes, Turkey's inflation rate has continued to accelerate and it jumped to 14.03 percent in November from 11.89 percent in October, almost three times the central bank's medium-term target of 5.0 percent.

      But the rate hike was welcomed by the foreign exchange market with the lira continuing its recent rise from a record low around 8.52 to the U.S. dollar on Nov. 8 when Erdogan's son-in-law resigned. 

      Since then the lira has appreciated xx percent against the dollar to trade at 7.57 today 7.57  7.65

      However, the lira is still down 21.4 percent since the start of the year, one of the biggest losers among emerging market currencies this year along with Argentina's peso, explaining some of the upward pressure on inflation from the rise in import prices.

      The continued rise in the lira indicates that financial markets are still voicing confidence in the change in the direction of Turkey's economic policy following the change in finance minister and governor in November toward a more orthodox policy.

      In addition to the change in governor and finance minister, Erdogan on Nov. 11 pledged a new economic strategy based on stability, lower inflation and international investment. 

      Erdogan's pledge came two days after the bank's new governor, Agbal, in his first public comments on Nov. 9 underscored his commitment to price stability.

      On Dec. 16 Agal confirmed his determination to achieve disinflation, saying he would tighten policy to achieve this and a tight and decisive monetary policy would be maintained in 2021 to reach an interim target of 9.4 percent inflation by the end of 2021 and then 5.0 percent in 2023.

      Agbal also confirmed that CBRT would be following a more normal monetary policy, with the one-week repo rate its main policy tool to signal its stance while the rate corridor and late liquidity window only used for temporary liquidity issues, unlike its move under the previous governor when markets were left confused as the bank on occasions used a range of tools to adjust lending rates.

      Agbal's commitment to stamp out inflation and rebuild foreign exchange reserves - which have declined to a 15-year low - should also help in reducing the level of dollarization in Turkey where many citizens used U.S. dollars to protect their savings.

      In recent years the central bank's policy has zig-zagged with investors questioning its commitment to low inflation - putting downward pressure on the lira - and its independence from political pressure as Erdogan for years has openly called for low interest rates to boost economic growth, arguing high interest rates cause high inflation, an view that is not shared by financial markets or economists.

      In today's statement, the central bank confirmed that a tight monetary policy will be "decisively sustained until strong indicators point to a permanent fall in inflation in line with the targets and to price stability." 

      Turkey's economy has bounced back fast from the hit to activity in the second quarter, with gross domestic product rising 15.6 percent year-on-year in the third quarter after declining 10.8 percent in the second quarter.

      CBRT said a partial recovery of the global economy is continuing in the fourth quarter though uncertainty prevails due to the recent rise in COVID-19 infections just as the vaccine is showing positive developments.

      Nationally, data for the fourth quarter point to a "strong course" in economic activity but new restrictions due to the rising number of virus cases create uncertainty about the outlook in the short run, especially for the services sector.

Thailand holds rate 5th time, trims 2021 growth outlook

     Thailand's central bank left its policy rate steady for a fifth time and while it lowered its forecast for economic growth next year due to the resurgence of COVID-19 it once again expressed its concern over any "potential rapid" rise of the baht, adding it is willing to take further measures.

     The Bank of Thailand (BOT) kept its policy rate at 0.50 percent, unchanged since cutting it for the third time this year in May. 

      BOT cut its policy rate by a total of 75 basis points in February, March and May, continuing an easing cycle that began in August 2019 in response to slowing global growth from the U.S.-China trade war. 

     Since August last year the rate has been cut five times by a total of 125 basis points.

     As in November, BOT's monetary policy committee was unanimous in its decision - though one member could not attend the meeting - reiterating it was maintaining the rate to "preserve the limited policy space in order to act at the appropriate and most effective timing."

      The outbreak of COVID-19 in the spring hit Thailand's important tourism sector hard but private consumption and merchandise exports have recovered faster than expected and BOT lowered its forecast for the economy's contraction this year to 6.6 percent from September's forecast of 7.8 percent.

      Thailand's gross domestic product shrank 6.4 percent year-on-year in the third quarter of this year, down from a 12.1 percent fall in the second quarter but up from a 2 percent fall in the first quarter. 

      In 2019 the Thai economy grew 2.4 percent.

      "The Committee assessed that the Thai economy continued to recover but downside risks and uncertainties remained high in the period ahead," BOT said, adding the economy would thus need support from the continued low policy rate.

     In 2021 the economy is seen expanding 3.2 percent, less than the 3.6 percent that was previously forecast due to the prolonged outbreak of the pandemic and thus a delay in a recovery of tourism, with the number of visitors now seen at 5.5 million instead of 9.0 million, still sharply below 2019's 39.9 million.

     But with COVID-19 vaccinations now beginning to roll out, BOT expects tourism to become the key driver of economic growth in 2022, with the number of tourists rising to 23.0 million and exports growing 12.3 percent, boosting economic growth to 4.8 percent.

     The strength of the Thai baht has been a concern for its exporters for years and its rise since early April on optimism over the global economic recovery has triggered political protests.

      In its statement last month BOT not only expressed concern over what it said was a "rapid appreciation of the baht as this affected the fragile economic recovery," but also scheduled a briefing on measures to address the issue, leading to a fall in the baht's exchange rate.

       But instead of the briefing, BOT announced further measures to allow Thais to freely deposit and transfer funds in foreign currency deposit accounts and invest more in foreign securities, enabling exporters to more effectively manage liquidity and foreign exchange risks, along with intervened in the foreign exchange market to limit excessive volatility.

      Today, BOT changed its tone and instead of expressing its concern over the past rise in the baht it pointed to a "potential rapid appreciation of the baht owing to risk-on sentiment in financial markets and the weakening outlook of the US dollar."

      The bank's policy committee said it would closely monitor the foreign exchange market and consider "the necessity of implementing additional appropriate measures, as well as continue to expedite new foreign exchange ecosystem."

     After hitting a record low of more than 36 to the U.S. dollar in October 2015, the baht rose steadily until April 2018. But after rising for a few months, the baht continued its steady rise until the start of this year when it hit a popped above 30 to the dollar on Jan. 1.

     In the next three months it fell to 33 to the dollar but since the start of April it has risen steadily until last week when it once gain breached 30 to the dollar. Since then, however, the baht has eased slightly to trade at 30.2 to the dollar, today, up 9.3 percent since this year's low of 33.0 on April 2.

     The baht is thus ending the year some 0.7 percent below its level at the start of the year but up 20.5 percent since its recovery low in October 2015.

Paraguay maintains rate 6th month as activity improves

     Paraguay's central bank left its policy rate steady for the 6th consecutive month, saying short-term economic data for economic activity and demand continue to be favorable, as expected, though in accumulated terms output still remains below last year.

     The Central Bank of Paraguay (BCP) left its policy rate at 0.75 percent after cutting it five times earlier this year, including three cuts in March, by a total of 325 basis points. The last cut was in June.

     As in November, the bank's monetary policy committee's decision was unanimous.

     Looking to its neighboring economies, BCP said Brazil's industrial sector had shown a slight improvement in annual terms while the latest information from Argentina shows another decline.

     Domestically, economic activity and demand is continuing to improve while credit issued had also continued to rise, driven by consumption and wholesale trade, and consumer confidence had improved on the margin.

      On the other hand, infections of COVID-19 have risen, triggering new containment measures.

      In the second quarter of this year, Paraguay's gross domestic product shrank by an annual 6.5 percent after a 4.4 percent expansion in the first quarter while headline inflation rose to 2.2 percent in November, the highest since March and up from 1.7 percent in October.

      Although inflation is showing a rising trajectory, BCP said it remains below its 4.0 percent target and no significant inflationary pressures are forecast in the short term while inflation expectations remain anchored to the target.

     Earlier this month the bank's president, Jose Cantero, forecast 4.0 percent growth in 2021, driven a recovery of the country's industry, commerce and services.

     After falling from late April to a new record low of 7,086 to the U.S. dollar in late November, the exchange rate of Paraguay's guarani has bounced back 1.5 percent this month and was trading around 6,980 today, down 7.5 percent since the start of this year.

     www.CentralBankNews.info

     

This week in monetary policy: China, Paraguay, Thailand, Turkey and Egypt

     This week - December 21 through December 26 - central banks from 5 countries or jurisdictions are scheduled to decide on monetary policy: China, Paraguay, Thailand, Turkey and Egypt.
    Following table includes the name of the country, the date of the next policy decision, the current policy rate, the local time a policy decision is announced, 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 be accessed by clicking on This Week.
 

WEEK 52
DEC 21 - DEC 26, 2020:
CHINA	21-Dec	3.85%		0	-30	4.15%	EM
PARAGUAY	21-Dec	0.75%		0	-325	4.00%
THAILAND	23-Dec	0.50%		0	-75	1.25%	EM
TURKEY	24-Dec	15.00%	14:00	475	300	12.00%	EM
EGYPT	24-Dec	8.25%		-50	-400	12.25%	EM

   

 www.CentralBankNews.info 

Azerbaijan cuts rate 17th time as inflation seen weak

      Azerbaijan's central bank lowered its policy interest rate for the fifth time this year, saying actual and projected inflation remains below the midpoint of its target range in the context of weak external and domestic demand due to the COVID-19 pandemic, showing there was a potential for an easing.
     The Central Bank of the Republic of Azerbaijan (CBA) cut its discount rate by another 25 basis points to 6.25 percent and has now cut it 125 basis points this year following earlier cuts in January, June, July and September.
     Since February 2018, when CBA entered a monetary policy easing cycle, the key rate has been cut 17 times and by a total of 8.75 percentage points from 15.0 percent.
      Future decisions about the interest rate corridor - where the lower limit is now 5.75 percent and the upper limit 6.75 percent - will take into account the impact of the pandemic, the pace of economic recovery and the likelihood of internal and external risks, the central bank said.

      CBA said today's policy decision was in the context of a continued balance in the foreign exchange market, weak growth in money supply and credit while the latest trends in the global energy market, and the prospects for their continuation in 2021, may support an improvement in Azerbaijan's external position and expectations for economic entities.

      Like many oil-exporting countries, Azerbaijan maintains a managed exchange rate regime against the U.S. dollar its currency, the manat, has been steady since 2017 at a rate around 1.7.

      The strategic foreign exchange reserves of Azerbaijan, where the world's first oil well was  drilled in 1846, has risen 3.3 percent since the start of this year to $50 billion, exceeding the annual gross domestic product.

      Azerbaijan's inflation rate was steady at 2.8 percent in October and November and CBA said factors that reduce inflation in the short run remain dominant as rising global food prices and anti-virus spending is offset by declining demand while a stable exchange rate and lower demand for credit amid significant uncertainties are the main factors behind stable prices.

      CBA's target range for inflation is 4.0 percent, plus/minus 2 percentage points, and the bank forecast inflation of around 3 percent by the end of this year and between 3.5 and 4.0 percent in 2021.

      In the medium-term, however, the recovery of demand and thus economic growth will be one of the main factors influencing inflation, with an improvement in the external environment, deferred demand and credit and fiscal activity, which envisages the implementation of construction in the occupied territories, will also boost demand, CBA said.

      Last month Azerbaijan and neighboring Armenia signed a Russian-brokered peace deal to end a conflict over the Nagorno-Karabakh region and CBA's rate cut comes only three days after Armenia's central bank raised its rate and signaled further hikes as it expects inflation to rise from rising global prices and strengthening domestic demand.

      Azerbaijan's economy shrunk an annual 3.5 percent in the second quarter of this year, up from a 2.7 percent decline in the first quarter and CBA said GDP in the first 11 months of the year was down 4.3 percent, including 2.9 percent in the non-oil sector.

      However, data shows economic activity is recovering, with business confidence growing in the non-oil refining, trade and services sectors in November from October.

      "Economic growth is expected to resume in 2021 due to the improvement of the external environment and the activation of deferred demand," CBA said, adding fiscal stimulus, measures to prevent a decline in credit flows and large-scale economic development will further support optimism.

     www.CentralBankNews.info

     

Norway holds rate but pulls forward 1st hike to H1 2022

     Norway's central bank again left its benchmark interest rate steady and while the resurgence of the COVID-19 virus and stricter containment measures will lead to a slower economic recovery in the near term, it said the likelihood of a wide availability of vaccinations next year will quickly boost demand, raising the prospect of a rate hike earlier than previously forecast.

     Norges Bank (NB), which slashed its policy rate three times this year by a total of 150 basis points to 0.0 percent, said its new economic forecast implies a rate hike in the first half of 2022 as compared with its earlier forecast of a rate hike in late 2022.

    "The sharp economic downturn and considerable uncertainty surrounding the outlook suggest keeping the policy rate on hold until there are clear signs that economic conditions are normalizing," NB Governor Oeystein Olsen said.

     "The policy rate forecast implies a rate at the current level for over a year ahead, followed by a gradual rise from the first half of 2022 as activity approaches a normal level," he said, adding this implies a somewhat faster rate rise than projected in September.

     In its December monetary policy report, NB pencilled in an average policy rate of 0.0 percent in 2021, rising to 0.3 percent in 2022, up from September's forecast of 0.2 percent, and 0.8 percent in 2023, up from 0.3 percent.

     As many other economies, Norway's economy was hit hard by the pandemic and containment measures and economic activity plunged in the first and second quarters of this year. The central bank slashed its key interest rate twice at unscheduled policy meetings in March and then once in May.

     Although several other countries, such as neighboring Sweden and the European Central Bank (ECB), have resorted to negative interest rates and asset purchases to aid their country's recovery, NB always judged the cost of negative rates outweighed the benefits.

      In the third quarter of this year Norway's economy rebounded but higher infection rates and new containment measures are now holding back the recovery and consumption, with gross domestic product of Norway's mainland seen contracting 3.5 percent this year, down from 2.4 percent growth in 2019.

      Although the arrival of vaccines in coming months should result in a faster pick-up in economic activity than earlier expected, NB cautioned it will take time for output and employment to return to pre-pandemic levels and maintained its forecast for 2021 GDP growth at 3.7 percent.

      NB  lowered its forecast for domestic demand in 2021 to expand by 3.7 percent as compared with the September forecast of 5.0 percent growth.

     But by 2022 demand will bounce back as household consumption rises further, helped by higher house prices, exports pick up steam and investment in its petroleum industry improves.

     Norway's mainland economy is seen expanding 3.1 percent in 2022, up from the earlier forecast of 2.9 percent, and then 1.6 percent in 2023, down from 1.9 percent.

    Norway's inflation rate fell sharply to 0.7 percent in November from 1.7 percent in October and the stronger exchange rate of the krona - helped by the rise in crude oil prices - will continue to lower import prices and thus inflation.

     Headline inflation is seen averaging 1.3 percent this year, then 2.2 percent in 2021, 2.0 percent in 2022 and 1.7 percent in 2023.

Costa Rica maintains rate, to continue with easy policy

      Costa Rica's central bank left its key interest rate steady, saying there is room to continue with loose monetary policy as inflation is forecast to remain below the lower limit of its tolerance range in 2021 and 2022.
     The Central Bank of Costa Rica (BCCR) kept its monetary policy rate at 0.75 percent after cutting it three times this year by a total of 200 basis points. 
     Since March 2019, BCCR has cut its rate 10 times and by a total of 450 basis points.

     Although the gradual lifting of measures to limit the spread of COVID-19 has allowed a moderate recovery of economic activity and in the labour market, BCCR said economic output remains below its potential and the index for economic activity in October fell 6.6 percent year-on-year, the unemployment rate was 21.9 percent and demand for credit continues to stagnate.

     Costa Rica's economy contracted 8.3 percent in the second quarter from the first quarter and in October the central bank revised upwards its forecast for the economy to shrink 4.5 percent this year from its earlier forecast of a 5.0 percent decline.

     For 2021 Costa Rica's economy is expected to expand by 2.6 percent compared with 2019's 2.1 percent expansion.

     The pandemic has accentuated the country's disinflationary pressures since 2019 and in November the inflation rate fell to 0.24 percent from 0.45 percent in October, well below the central bank's tolerance range of 2.0 to 4.0 percent.

     In addition, market expectations for inflation 12 months ahead were 0.9 percent in November.

     www.CentralBankNews.info

US Fed holds rate, to continue to buy $80B of bonds

     The U. S. Federal Reserve left its key interest rate steady, as widely expected,  and said it would continue to increase its holdings of government bonds to support the flow of credit to households and businesses, boost inflation and employment in light of the "tremendous human and economic hardship" from the COVID-19 pandemic to the U.S. and global economy.

     The central bank for the United States kept its target range for the federal funds rate at 0.0-0.25 percent, unchanged since two rapid-fire rate cuts totaling 150 basis points in early March.

      The Fed confirmed it expects to maintain an accommodative monetary policy stance until it achieves its twin objectives of maximum employment and inflation of 2 percent over the long run and confirmed it in its latest projection that it expects to keep the federal funds rate at this level through 2023.

      In addition to the rock-bottom interest rates, the Fed said it would continue to increase its holdings of Treasury securities by at least $80 billion a month and of agency mortgage-backed securities by at least $40 billion a month and will continue "until substantial further progress" is made toward reaching its objectives, underscoring its loose policy stance.

      Reflecting the bounce-back in the U.S. and global economy in the third quarter after a contraction in the second quarter from lockdowns and other restrictions to movements, the Fed raised its forecast for economic growth this year to a contraction of 2.4 percent from September's forecast of a 3.7 percent decline in gross domestic product.

     "The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and the world," the Fed's policy-making body, the Federal Open Market Committee (FOMC) said, adding the path of the economy will depend significantly on the course of the virus, which continues to pose considerable risks to the economic outlook over the medium term.

      In 2021 the U.S. economy is seen expanding 4.2 percent, slightly up from the earlier forecast of 4.0 percent, and then 3.2 percent in 2022 and 2.4 percent in 2023.

      In the third quarter of this year U.S. GDP grew 33.1 percent from the second quarter, when GDP shrank 31.4 percent. Year-on-year, GDP declined 2.9 percent in the third quarter after a 9 percent fall in the second quarter.

      Despite an uptick in financial markets' outlook for inflation, the Fed only raised its forecast for inflation slightly, with the measure for personal consumption expenditures (PCE) rising to 1.8 percent in 2021, up from an expected 1.2 percent this year, and a previous forecast of 1.7 percent, and then 1.9 percent in 2022, up from an earlier forecast of 1.8 percent.

     By 2023 inflation is still only seen at 2.0 percent and the Fed confirmed it aims to push inflation "moderately above 2 percent for some time so that inflation averages 2 percent over time."

     Consumer price inflation was steady at 1.2 percent in November and October.

Armenia hikes rate, signals more hikes on rising inflation

     Armenia's central bank raised its key interest rate after slashing it four times earlier this year and estimated it would need to further scale back its current stimulative monetary policy stance as inflation is expected to accelerate, boosted by rising global prices and strengthening domestic demand.
     The Central Bank of Armenia (CBA) raised its refinancing rate by 100 basis points to 5.25 percent, partly unwinding the total 125 point rate increase from hikes in March, April, June and September.

     "Taking into account some acceleration of inflation amid the expected inflationary effects from the external sector and considering the increase in the country's risk premium, the CBA board considers it appropriate to raise the refinancing rate," the bank's board said.

      The board estimated it will need to gradually reduce its current stimulative monetary stance to ensure inflation stabilizes around its target of 4.0 percent.

     Armenia's inflation rate rose slightly to 1.6 percent in November from 1.3 percent in October but CBA said inflationary trends had been seen in international prices for raw materials and food.

     This was now gradually being reflected in inflation rates in other countries and this would impact Armenian inflation while the start of vaccinations against the COVID-19 virus was creating a positive environment for a recovery of global demand in 2021, the bank said.

     Armenia's economy has been hit hard by the twin shocks of the coronavirus and the worst military confrontation with neighboring Azerbaijan since the early 1990s.

     After more than a month of bloodshed over the Nagorno-Karabakh region, Armenia, Azerbaijan and Russia on Nov. 10 signed a deal to end the conflict, with Russia deploying peacekeepers along the frontline in the region and in the corridor between the region and Armenia.

      This weekend Azerbaijan's defence ministry reported the first casualties since the ceasefire while Armenia also said some of its servicemen had been wounded.

     Armenia's economy shrank by 9.1 percent in the third quarter year-on-year after a 13.7 percent decline in the second quarter and CBA said economic activity will remain weak in the fourth quarter due to the negative effect of martial law, the outbreak of a new wave of coronavirus and uncertainty over the economic prospects.

      However, loose fiscal policy will continue to have a positive impact on domestic demand and CBA said it had not revised its forecast for economic growth though it is ready to respond to any changes in the economy to ensure price stability at a time of great uncertainty.

      The International Monetary Fund's executive board last week approved a third review of its stand-by-arrangement with Armenia, allowing it to draw down a further US$37 million. This brought  total disbursements to $332 million in a 3-year deal approved in May 2019 and increased in May this year.

      The IMF forecast that Armenia's economy would contract 7.25 percent this year, following growth of 7.6 percent in 2019, and said its support would help the country meet the challenge of the twin crises, which have also led to a deterioration of its fiscal position.

      It added monetary policy was rightly accommodative, helping keep the banking sector liquid while the exchange rate has remained stable and inflation low.

Morocco maintains rate 2nd time amid drought, virus

     Morocco's central bank left its key interest rate steady for the second time, saying the current accommodative monetary policy stance remains appropriate in light of the double shock to the economy this year from the COVID-19 pandemic and drought.

     The Bank of Morocco, or Bank Al-Maghrib (BAM), maintained its policy rate at 1.5 percent, as in its previous meeting in September, after cutting it twice this year by a total of 75 basis points following cuts in March and June.

     Morocco has been hit by a double shock this year, both the pandemic and persistent drought that hit farm crops, with the government easing its fiscal policy to minimize the economic and social impact.

    "On the national level, data for the last two quarters illustrate the extent of the double shock suffered by the national economy due to the pandemic and unfavorable climate conditions that marked the previous agricultural season," the central bank said.

     Morocco's gross domestic product contracted 14.9 percent in the first quarter year-on-year after 0.1 percent growth in the first quarter, with non-agricultural activities shrinking 15.5 percent and valued added in agriculture down 6.9 percent.

     The labour market has also been hit hard, with the unemployment rate rising to 12.7 percent in the third quarter from 12.3 percent in the second quarter, for the highest rate since the fourth quarter of 2001.

     BAM now expects the economy to contract 6.6 percent this year, up from its September forecast of 6.3 percent and the June forecast of 5.2 percent, as the recovery from the second quarter is expected to remain slow and only partial amid a new surge in infections.

     In the medium term, an improvement in household income and measures to support investment, the output of non-agricultural actives should reach 3.3 percent in 2021 and 3.6 percent in 2022.

     Agricultural output is also expected to bounce back, growing 13.8 percent next year and 2.0 percent in 2022.

      Overall, the economy is seen expanding 4.7 percent in 2021 and then 3.5 percent in 2022, though BAM cautioned the forecast remains surrounded by a high degree of uncertainty.

      But the balance of risks are to the upside, the bank said, pointing to the beginning of COVID-19 vaccinations and the establishment of a strategic fund dedicated to investment.

      Last month the International Monetary Fund (IMF) forecast Morocco's economy would shrink between 6 and 7 percent this year, depending on the extent of the virus, but then rebound and expand 4.5 percent in 2021 as the impact of the drought and pandemic wanes.

     Although Morocco's fiscal and external deficits are set to widen this year due to lower tax receipts and tourism revenue, the IMF said the resilience of remittances and lower imports have contained its needs and its international reserves remain comfortably above last year, helped by IMF's precautionary liquidity line in April and the country's access to external financing.

     And while the economic recovery is sluggish, inflation has accelerated sharply in the last three months, mainly due to higher food prices. 

     After inflation was negative May through July, it rose in August and September to 1.3 percent in October.

     BAM forecast inflation should average 0.7 percent this year, up from its September forecast of 0.4 percent, and then remain almost stable in 2021 before rising to 1.3 percent in 2022 as demand improves.

     www.CentralBankNews.info

   

Uganda holds rate, growth below potential till 2023/24

     Uganda's central bank kept its key interest rate steady for the third time as it trimmed its forecast for inflation this year due to the extent of the spare capacity in the economy at the same time the recovery from the pandemic gradually gains traction and risks to the near-term economic outlook ease.

     The Bank of Uganda (BoU) left its Central Bank Rate (CBR) at 7.0 percent as in August and October after cutting it by 200 basis points in April and June. 

     Since BOU began easing its policy in October 2019, the rate has been cut 3 percentage points.

     High frequency economic indicators in the three months to October indicate annual growth of 3.3 percent in sharp contrast to a contraction of 6 percent in the second quarter but BoU said this was in line with its projection for economic growth in fiscal 2020/21, which began July 1, of over 3 percent.

     "However, the recovery is proceeding at an uneven pace," BoU said, adding social distancing measures continue to weigh on hospitality and tourism and economic activity is expected to take longer to recovery and resource utilization will take longer to return to normal.

     "Economic growth is therefore projected to remain below its potential until FY2023/24," BoU said, adding there is a need for monetary policy to remain accommodative until the economy normalizes as inflation is projected to be well contained in the medium term.

     In October BoU forecast Uganda's economy would contract between 0.2 and 0.5 percent in calendar year 2020 while growth in fiscal 20/21 was projected at 2.0 to 2.0-3.0 percent, rising to 5.0-6.0 percent in 2021/22 and 6-7 percent in later years.

     In 2019 Uganda's economy grew 5.6 percent, largely driven by an expansion of the services sector, construction and mining. 

      But the COVID-19 pandemic hit economic activity hard, along with the invasion of locusts and flooding, and earlier this month the World Bank forecast gross domestic product growth of 0.4 to 1.7 percent as exports, tourism, remittances and foreign direct investment shrunk.

     "The medium-term outlook is also not favorable for Uganda," the World Bank said, adding heightened uncertainty around the upcoming February 2021 elections further exacerbate risks.

     Although BoU said the news about a vaccine "is reassuring and presents positive prospects," it revised downwards its forecast for inflation from October due to the considerable spare capacity in the economy.

     Inflation is now projected in a range of 5.0 to 6.5 percent in 2020 before converging to its medium-term target of 5 percent.

     In October BoU said there was a near-term upside to inflation and saw core inflation remaining above 5 percent before gradually returning to 5 percent in 2022.

     Uganda's headline inflation rate dropped to 3.7 percent in November from 4.5 percent in October but core inflation only eased to 5.8 percent from 6.3 percent.

     After falling sharply in March and then rebounding in the following months, Uganda's shilling has risen since the start of November and rose further today. 

     The shilling was trading at 3,668.6 to the U.S. dollar today, up 6 percent since a low on March 25 but still down 0.4 percent since the start of this year.

     www.CentralBankNews.info

This week in monetary policy: Kazakhstan, Uganda, Honduras, Hungary, Armenia, Morocco, Mozambique, Albania, USA, Costa Rica, Taiwan, Philippines, Indonesia, Norway, Switzerland, Czech Rep., UK, Mexico, Japan, Russia, Azerbaijan, Mongolia, Jamaica & Colombia

    This week - December 14 through December 19 - central banks from 24 countries or jurisdictions are scheduled to decide on monetary policy: Kazakhstan, Uganda, Honduras, Hungary, Armenia, Morocco, Mozambique, Albania, United States, Costa Rica, Taiwan, Philippines, Indonesia, Norway, Switzerland, Czech Republic, United Kingdom, Mexico, Japan, Russia, Azerbaijan, Mongolia, Jamaica and Colombia.

     Following table includes the name of the country, the date of the next policy decision, the current policy rate, the local time a policy decision is announced, 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 51
DEC 14 - DEC 19, 2020:
KAZAKHSTAN	14-Dec	9.00%	15:00	0	-25	9.25%	FM
UGANDA	14-Dec	7.00%		0	-200	9.00%
HONDURAS	14-Dec	3.00%		-75	-250	5.50%
HUNGARY	15-Dec	0.60%		0	-30	0.90%	EM
ARMENIA	15-Dec	4.25%		0	-125	5.50%
MOROCCO	15-Dec	1.50%		0	-75	2.25%	FM
MOZAMBIQUE	16-Dec	10.25%	16:00	0	-250	12.75%
ALBANIA	16-Dec	0.50%		0	-50	1.00%
UNITED STATES	16-Dec	0.25%	14:00	0	-150	1.75%	DM
COSTA RICA	16-Dec	0.75%		0	-200	2.75%
TAIWAN	17-Dec	1.125%		0	-25	1.375%	EM
PHILIPPINES	17-Dec	2.00%		-25	-200	4.00%	EM
INDONESIA	17-Dec	3.75%		-25	-125	5.00%	EM
NORWAY	17-Dec	0.00%	10:30	0	-150	1.50%	DM
SWITZERLAND	17-Dec	-0.75%	9:30	0	0	-0.75%	DM
CZECH REPUBLIC	17-Dec	0.25%	14:30	0	-175	2.00%	EM
UNITED KINGDOM	17-Dec	0.10%	12:00	0	-65	0.75%	DM
MEXICO	17-Dec	4.25%	13:00	0	-300	7.25%	EM
JAPAN	18-Dec	-0.10%		0	0	-0.10%	DM
RUSSIA	18-Dec	4.25%	13:30	0	-200	6.25%	EM
AZERBAIJAN	18-Dec	6.50%		-25	-100	7.50%
MONGOLIA	18-Dec	6.00%		-200	-500	11.00%
JAMAICA	18-Dec	0.50%		0	0	0.50%
COLOMBIA	18-Dec	1.75%		0	-250	4.25%	EM

 
    www.CentralBankNews.info