Kuwait to start unwinding COVID crises measures

     Kuwait's central bank became the second in the Gulf region to tighten its monetary policy stance this year, saying it had "decided to start unwinding measures imposed since April 202 to counter the COVID-19 pandemic, after the banking sector's success in overcoming the first year of the crises."

     Last year the Central Bank of Kuwait (CBK) cut its benchmark discount rate twice in March by a total of 1.25 percentage points, the same month another 66 central banks, including the U.S. Federal Reserve, cut rates by a total 92 times to support economic activity during the height of the pandemic.

     The following month, CBK then took several macro prudential initiatives to help the ability of banks' to offer credit and loans, including allowing the banks to release capital conservation buffers and lowering the credit risk weight when calculating capital adequacy ratios. 

     In October 2020 CBK also cut all interest rates that cover the entire yield curve of up to 10 years, including the repo rate, term deposit rates, direct intervention rates and those on public debt in response to a decline in U.S. rates, which it said was putting upward pressure on its dinar.

     In its statement, CBK did not specify which crises measures it was unwinding, only saying it had earlier amended regulatory instructions and macro prudential tools to ward off repercussions of the pandemic.

     Last month the central bank of the United Arab Emirates (UAE) began what it said was a "gradual and well-calibrated" withdrawal of extraordinary stimulus measures taken last year as the gradual recovery of the economy meant there would be less need for extraordinary stimulus.

    After plunging in March last year, Kuwait's dinar has slowly firmed against the U.S. dollar until last month when it began giving up some of its gains.

     Today the dinar was trading at 0.302 to the U.S. dollar, down 0.9 percent this year but up 4.3 percent since March 26, 2020.

     Between 1975 and 2002 Kuwait's dinar was pegged to a weighted basket of currencies of its major trading partners, but from 2003 to 2007 CBK dropped that peg and pegged it directly to the U.S. dollar.

      In 2007 CBK then reverted to its earlier exchange rate policy of pegging to dinar to an undisclosed weighted basket of currencies to curb growing inflationary pressures.

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Saudi Arabia extends deferred payment program again

     Saudi Arabia's central bank eased its policy stance for the second time this year by once again extending one of the support measures it launched last year to support businesses that were most severely affected by the COVID-19 pandemic.

      The Saudi Central Bank, renamed last year from the Saudi Arabian Monetary Authority (SAMA), extended its Deferred Payment Program to Dec. 1, 2021, from Oct. 1, saying this was "for the benefit of micro, small and medium enterprises (MSMEs) that continue to be affected by the COVID-19 precautionary measures."

     In June the Saudi Central Bank also extended the deferred payment program, which allows businesses to delay payments on loans, by 3 months to Sept. 30 from July 1.

     Since the program was launched in March, 2020, it has benefitted more than 107,000 contracts with a value of 174 billion riyals in deferred payments, the central bank said in its statement from Sept. 29.

     The number of contracts benefiting from the bank's Guaranteed Financing Program has exceeded 6,000 contracts, with total financing value of more than 11 billion riyals, it added.

     The economy of Saudi Arabia, the world's top oil exporter, shrank 4.1 percent last year but is recovering this year, helped by the rise in crude oil prices.

     In addition to renaming the central bank, the new law that was approved in November 2020, also gave the Saudi Central Bank responsibility for supporting economic growth in addition to its previous responsibilities of maintaining monetary stability, which includes keeping enough reserves to protect the riyal's peg to the U.S. dollar, and maintaining financial sector stability.

     Under the new law, the central bank reports directly to the King of Saudi Arabia.

     Despite the name change, the Saudi Central Bank will continue to use the acronym of SAMA due to its historic significance, local and global relevance, and banknote bearing the name of the Saudi Arabian Monetary Authority will remain in circulation and keep their status as legal tender.

     

     www.CentralBankNews.info

UAE starts gradual withdrawal of crises measures

      The central bank of the United Arab Emirates (UAE) said it is starting a "gradual and well-calibrated" withdrawal of extraordinary stimulus measures taken last year during the height of the COVID-19 pandemic to avoid restricting credit supply and economic growth.

     "Our assessment, confirmed by recent economic data, affirms the UAE economy's gradual recovery," Khaled Mohamed Balama, governor of the Central Bank of the UAE (CBUAE) said in a statement.

     "As we enter the next phase of the post-COVID recovery, there will be less need for extraordinary stimulus measures," he added on Sept. 23.

       Last year CBUAE, as other central banks, cut its main interest rates and undertook various measures to ensure the flow of liquidity to the banking system and to support economic activity.

       CBUAE grouped its different measures - such as financing for loan deferrals and zero-cost liquidity -under a Targeted Economic Support Scheme (TESS).

       In April the central bank extended key parts of TESS until mid-2022, including allowing banks to access a zero-cost liquidity facility up to June 30, 2022 to provide new loans and financing to those most affected by the pandemic.

       It also extended financing for loan deferrals until the end of 2021 but will phase out the outstanding financing by Dec. 31, 2021.

      Today CBUAE said 15 percent of banks' loan portfolios had benefitted from the loan deferral program and confirmed the program would be phased out by the end of this year.

       It also confirmed that in the short term it would maintain the temporarily lowered reserve requirements for banks and the level of loan-to-value ratio on mortgage loans for first-time home buyers.

       CBUAE previously decided regulatory measures that allow banks to maintain lower capital and liquidity buffers will expire by the end of this year but said today is was looking at extending these for a limited period to facilitate a smooth economic recovery.

      UAE groups seven emirates, including Abu Dhabi and Dubai, and its oil and natural gas reserves are the 6th and 7th largest in the world, respectively.

Israel holds rate but ends business lending program

     Israel's central bank left its key interest rate unchanged, as expected, and while it reiterated it will "continue to conduct a very accommodative monetary policy for a prolonged time" it also began unwinding some of its extraordinary easy monetary policy by wrapping up a lending program.
     Bank of Israel (BOI) kept its interest rate unchanged at 0.10 percent, unchanged since April last year when it was cut for the first time in five years in response to the hit to economic activity from the COVID-19 pandemic.

     "The rapid recovery of economic activity continues," BOI said, adding there were not any material restrictions on economic activity at this point.

     However, since mid-June there had been an increase in a number of virus cases due to the Delta varian and this posed a risk to a continued recovery of the economy.

      The central bank's research staff lowered its forecast for economic growth this year to 5.5 percent from  the April forecast of 6.3 percent but raised the 2022 forecast by 1.0 percentage point to 6.0 percent.

      BOI said it had ended one of the programs that it had set up last year to help businesses cope with the impact of the pandemic. 

      Among BOI's programs put into effect last year - in addition to rate cuts - were a deferral of loan payments to banks for households and businesses, a reduction in banks' capital requirements and a loan program to banks against credit to small businesses along with bond purchases.

      As of Oct. 1, BOI will wrap up its program that provides long-term loans to the banking system against loans that are provided to small and micro businesses or upon the utilization of the program's 40 billion shekel.

     "With the removal of restrictions and the recovery of the economy, there is less need for the specific program to provide long-term loans to the banking system against loans to be issued to small and micro businesses, and the operation of this tool will be halted," BOI said.

      Inflation in Israel continued to rise to positive levels after registering negative rates much of last year, hitting 1.5 percent in May, up from 0.8 percent in April.

     BOI said inflation expectations for the coming year have continued to rise but remain within the target range of 1.0 to 3.0 percent.

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.

Kuwait holds key rate, cuts other rates to curb dinar rise

     Kuwait's central bank, which pegs its dinar currency to a weighted basket of currencies, left its benchmark discount rate steady but lowered the interest rate on other monetary policy instruments in response to a decline in U.S. interest rates which it said was putting upward pressure on the dinar.

     The Central Bank of Kuwait (CBK) kept its benchmark discount rate at 1.50 percent, unchanged since March 16 when it lowered its for the second time that month for a total cut of 125 basis points this year.

     But CBK cut its policy instruments that cover the entire interest rate yield curve up to 10-year terms, including its repo rate, term deposit rates, direct intervention rates and those on public debt by 0.125 percent, it said on Oct. 27.

     "This came amid continued decrease in interest rates on federal funds of the US Federal Reserve inching closer to zero-levels, which widened the margin tipping the scale on the side of the interest on the Kuwait Dinar as opposed to interest on the US greenback, thus bolstering the attractiveness of the Kuwaiti currency," CBK said.

     It added the move was part of its special measures to tackle the impact of COVID-19 on economic and banking conditions, including its earlier cuts to the discount rate.

     Between 1975 and 2002 Kuwait's dinar was pegged to a weighted basket of the currencies of its major trading partners but from 2003 to 2007 it dropped that and pegged it directly to the U.S. dollar.

     But after the dollar's decline starting in 2002, Kuwait in May 2007 reverted to its earlier exchange rate policy of pegging the dinar to an undisclosed weighted basket of currencies to protect the dinar's purchasing power and curb growing inflationary pressures.

     After falling in in late March to a low 0.315, the dinar has steadily firmed against the U.S. dollar to 0.305 on Oct. 21.

     In response to CBK's move, the dinar eased to 0.306 to the dollar today, down almost 1 percent this year but up 3 percent since the low on March 26.

Israel maintains rate as economy seen contracting less

     Israel's central bank left its main interest rate unchanged at 0.10 percent and while its staff now sees less of a economic contraction this year than it forecast last month, the monetary policy committee still left the door open for further easing if the crises were to continue.
     In April the Bank of Israel (BOI) cut its key rate for the first time in five years in response to the economic slowdown from measures to contain the COVID-19 pandemic and has also been using a range of other monetary tools to boost accommodation and ensure the orderly functioning of financial markets.
     "The Committee will expand the use of the existing tools, including the interest rate tool, and will operate additional ones, to the extent that it assesses that the crises is lengthening and it is necessary to achieve the monetary policy goals and to moderate the negative economic impact created as a result of the crises," BOI said.
     But compared with its last policy statement in April, BOI staff is more upbeat as some of the restrictions imposed to contain the spread of the coronavirus have been lifted.
    Real time data point to a recovery of economic activity in some industries, though activity is still low and in other industries where limitations have not been removed, activity remains around the lowest level.
     In a special update to its economic forecast, the bank's staff now sees an economic contraction this year of 4.5 percent, less than April's estimate of a 5.3 percent contraction.
     In 2021 Israel's gross domestic product is seen expanding 6.8 percent, down from April's forecast of 8.7 percent, assuming there won't be another wave of infections and restrictions.
     BOI said the first estimate of gross domestic product in the first quarter shows an annual 7.1 percent contraction.
     The gradual removal of restrictions after the Passover holiday is reflected in economic activity but the recovery is expected to take a long time and the adverse impact will be notable, BOI said.
     Israel's shekel was volatile in March, plunging just over 9 percent from March 1 to March 18 before the central bank offered $15 billion in currency swaps, helping the shekel firm so it was only down 2.8 percent by the end of the month against the U.S. dollar.
    This month it has been more stable, trading at 3.52 to the dollar today to be down 1.7 percent since the start of the year.
     BOI noted the shekel was now back to its pre-crises level, saying "to the extent that the exchange rate stabilizes at this level, it will weigh on the recovery of exports, particularly in view of the decline in global demand, and on the return of inflation to within the target range."
     Israel's inflation rate has decelerated sharply, with consumer prices down 0.6 percent in April from zero percent in March. In April BOI's staff forecast inflation this year would average a negative 0.8 percent before rising to a positive 0.9 percent in 2021.
     The fall energy prices has put downward pressure on inflation worldwide and BOI said short-term inflation expectations are below its target range of 1.0 to 3.0 percent while medium and long-term expectations are within its range.
     "At this point, there are no signs of an inflationary impact from the adverse shock to supply," BOI said, adding the crises has made it more difficult to calculate and analyze the meaning of changes to prices.

Israel cuts rate 1st time in 5 years as economy to shrink

     Israel's central bank cut its key interest rate for the first time in five years, launched a new monetary instrument to provide loans to banks for three years and expanded its repurchase transactions to include corporate bonds as security as it slashed its 2020 growth forecast and now expects a contraction of 5.3 percent, assuming the main restrictions to contain the spread of the coronavirus will be removed by the end of June.
      "The coronavirus crises halted the trend of growth and the economy has shifted into contraction," the Bank of Israel (BOI) said.
     BOI cut its main interest rate by 15 basis points to 0.10 percent and it is now the same from March 2015 until November 2018.
      BOI last cut its rate in March 2015 BOI and then held it at 0.10 percent until raising it in November 2018 on optimism over improving economic growth.
     "More than one-third of the economy is shut down, private consumption is lower by about one-quarter relative to the pre-crises period, and approximately 1 million workers, 24 percent of the workforce, have claimed unemployment benefits," BOI said.
     BOI's rate cut today underlines how fast the spread of the virus is hitting the global economy, forcing economists and central banks to ratchet down their expectations.
     It was only in February BOI's monetary policy committee confirmed it was expecting to maintain the rate at 0.25 percent for a prolonged period while it was intervening in foreign exchange markets to ensure its policy stance would remain accommodative despite the tightening from a rising shekel.
     However, BOI also said it had a range of tools at its disposal to make its policy more accommodative if needed but was optimistic the spread of the virus would be halted in coming months and the overall impact on the global economy would be limited.
     On March 4 BOI still didn't see any "evidence of a significant" impact on the country's economy from the spread of the virus and was still expecting a relatively quick recovery of the global economy.
     But by mid-March the deterioration in financial markets was accelerating as COVID-19 spread.
     On March 15 BOI began offering repo transactions to ensure bond markets would function smoothly, then on March 20 it cut the capital requirement for banks to ensure they could meet the rising demand for credit, and on March 23 it began purchasing government bonds in the secondary market to offset a lack of liquidity that was raising the cost of longer-term credit for firms.
     "The Committee will expand the use of the existing tools, including the interest rate tool, and will be able to operate additional ones, to the extent that the crises lengthens and it is necessary to achieve the monetary policy goals and to moderate the negative economic impact created as a result of the crises," BOI said.
     Despite the uncertainty about the extent of the virus, BOI now expects the economic recovery to begin in the third quarter, boosting growth in 2021 to 8.7 percent though the unemployment rate is expected to only decline gradually from an estimated 6 percent average this year and reach pre-crises levels by the end of next year.
     Inflation, which already was falling sharply in the second half of last year, is forecast by the bank's staff to be negative this year, at minus 0.8 percent, before rising 0.9 percent in 2021.
     BOI's interest rate is seen in the range of 0.0 to 0.1 percent at the end of this year and then rise to between 0 and 0.25 percent by the end 2021.
     BOI's new monetary tool with provide the banking system with fixed-rate loans at 0.1 percent for 3 years, with a size of 5 billion shekels and through the month of May, to increase the supply of credit to small businesses.
     It is also examining ways to effectively lower the interest rate on credit to small businesses even further as its move to buy government bonds in March may mainly affect credit to large companies.
     Starting on April 7, BOI will expand its repurchase tool and for the first time include corporate bonds rated AA or higher, as collateral, in addition to government bonds.

Egypt maintains rates after earlier emergency cut

     Egypt's central bank left its benchmark interest rates steady, saying this would be consistent with achieving its inflation target following the 300 basis point rate cut at an unscheduled monetary policy meeting on March 16.
     The Central Bank of Egypt (CBE) left its overnight deposit rate at 9.25 percent, the overnight lending rates at 10.25 percent, and the rate on its main operation and discount rate at 9.75 percent.
     The decision was largely expected by analysts, with Egypt's inflation rate easing to 5.3 percent in February from 7.2 percent in January on favorable base effects and contained inflationary pressures, CBE noted.
     CBE targets inflation of 9 percent, plus/minus 3 percentage points in the fourth quarter of this year and price stability over the medium term.
     Egypt's tourism sector has been hit hard by the spread of the coronavirus and the associated containment measures worldwide and CBE said its rate cut on March 16 was a pre-emptive move to support economic activity, especially within households and businesses, and support employment, which is "essential in order to avoid a prolonged slowdown in economic activity and help speed the recovery once the outbreak is contained."
     Egypt's economy grew 5.6 percent in the third quarter of 2019 year-on-year, down from 5.7 percent in the second quarter.

Israel cuts reserve requirement to ensure flow of credit

      Israel's central bank, one of the few central banks to have kept interest rates steady this year, lowered its capital requirement for regulatory purposes by 1 percentage point "to ensure the banks' ability to continue offering credit" during the coronavirus crises.
      The Bank of Israel (BOI), which has kept its key rate steady since raising it in November 2018, said its banking supervision department lowered the requirement for large banks to maintain a minimum Common Equity Tier 1 (CET1) ratio of 9 percent from 10 percent and to 8 percent from 9 percent for midsized and small banks.
      Israel's banks entered the coronavirus crises in a strong position, BOI said, adding they have large capital surpluses, strong liquidity ratios and high-quality credit portfolios.

     "Since the outbreak of the crises, demand for credit has increased sharply, and the risk level in credit provision has increased in parallel in view of the impact to the to the financial state of businesses and households," BOI said, adding it expects to use the capital that has been released to increase credit to businesses and households.

      Given their central role in societies, banks have always been required to hold certain amounts of capital to absorb unexpected losses. Years ago, capital meant gold or silver but today it comprises a many forms of stock or equity invested by its owners and shareholders, government and private securities and loans that generate interest.
      The requirements and methods of measuring capital has changed over the decades, with the most recent changes following the global financial crises. Banking regulators worldwide, grouped under the Basel Committee, tightened the requirements significantly to ensure banks would remain financially sound even during an economic or financial crises.
      CET1 is the most basic form of liquid assets that a bank can hold, such cash and stock.
      Another measure of reserve requirements is based on deposits at a bank. BOI has for many years set a 6 percent reserve requirement against demand deposits but the bank's statement did not say whether this ratio was changed.
       BOI said its decision to lower the capital requirement was in line with similar decisions in other countries and would be valid for six months and would be extended if necessary.
       In response to the crises, central banks worldwide have been slashing both reserve requirements and countercyclical capital buffers.
      The buffer was created after the global financial crises to ensure banks raise their capital during economic booms as a countercyclical measure so they can draw it down during a crises.
       BOI said the today's reduction of the capital requirement was based on the 2 percent capital buffer of each bank's total risk assets, an excess demand that went beyond the Basel standards to protect the country's banking system and the economy from unforeseen developments.
       BOI also instructed boards at banks to "re-examine their dividend and share buyback policies," in light of the material change in economic conditions, freeing up additional sources that can be used to provide credit and absorb losses, if necessary.
      This is similar to a move by the Czech National Bank (CNB).
      On March 16, when CNB cut its rate for the first of two times this month, it also cut the countercyclical capital buffer for its banks and said it expected banks to "refrain from a any dividend payouts or any other steps that might jeopardize individual bank's resilience."
       BOI's monetary policy committee is scheduled to meet on April 6. At its last meeting on Feb. 24, it maintained is key interest rate at 0.25 percent and confirmed its guidance that it expected to maintain the rate at this level for "a prolonged period."
       On March 15 the policy committee decided to carry out open market operations, offer repo transactions to financial institutions and purchase government bonds of various types and maturities "in necessary quantities" to ensure smooth functioning of the bond market.
      On March 23 BOI then said it would purchase 50 billion shekel of government bonds in the secondary market to ease the volatility in bond yields from a lack of liquidity and lower the cost of longer-term credit for firms and households as a complement to its low interest rate policy.

     www.CentralBankNews.info

   

Egypt cuts rates 300 bps to support economy from virus

     Egypt's central bank cut its benchmark interest rates by 300 basis points to support economic activity given the current "challenging external environment" while the outlook for inflation remains consistent with reaching the inflation target.
     The Central Bank of Egypt (CBE) cuts its overnight deposit rate, the overnight lending rate, the rate on the main operation and the discount rate to 9.25 percent, 10.25 percent, 9.75 percent and 9.75 percent, respectively.
      The rate cut, taken at an unscheduled meeting by the monetary policy committee, is the first by CBE since November 2019 when it paused after cutting rates six times and by a total of 650 basis points since February 2018.
      Including today's rate cut, CBE has now cut its rate by 950 basis points in two years.
      Egypt's inflation rate eased to 5.3 percent in February from 7.2 percent in January, and CBE targets inflation of 9.0 percent, plus/minus 3 percentage points by the fourth quarter of 2020.

Israel holds rate, says has range of tools if hit by virus

     Israel's central bank left its key interest rate steady at 0.25 percent and confirmed its recent guidance that it expects to maintain this rate for a prolonged period or to reduce it to ensure inflation stabilizes around the midpoint of its target range and the economy continues to grow strongly.
     The Bank of Israel (BOI), which has kept its rate steady since raising it in November 2018 for the first time since 2012, also reiterated it was taking additional steps to make monetary policy more accommodative, a reference to its intervention in foreign exchange markets to curb the strong shekel.
     While the outbreak of the coronavirus in China is "casting uncertainty regarding future economic activity globally and in Israel," BOI said its baseline scenario is that the spread of the virus will be halted in coming months and the overall impact on the global economy will be limited.
    "The Bank of Israel's assessment in this scenario is that no significant macroeconomic impact is expected in Israel," it said.
     However, if the crises were to spill over into additional countries and preventative measures are required in Israel, it is expected to have a more significant economic impact.
    "In such as scenario, the Monetary Committee has a range of tools to make monetary policy more accommodative," BOI said.
     Israel's inflation rate has been below the lower bound of BOI's 1.0 - 3.0 percent target range since June last year and fell to 0.3 percent in January from 0.6 percent in December.
     "The moderation of inflation is largely influenced by the appreciation of the shekel," BOI said, adding it is possible the inflation rate may be negative in coming months before moving back toward the lower bound of the target range in the second half of the year.
     The shekel has been rising since early 2019 and BOI has a history of intervening to curb it.
     In November and December last year BOI purchased $3.6 billion in one of its biggest bouts of intervention in nearly a decade, and at the end of January BOI's foreign exchange reserves rose $3.9 billion from end-December to $129.97, mainly due to foreign exchange purchases totaling $2.95 billion.
     In its January press conference, BOI Governor Amir Yaron affirmed the banks' readiness to prevent "excessive appreciation of the shekel, by purchasing foreign exchange whenever necessary" as it sees the rise due to short-term financial factors.
     But BOI's foreign exchange intervention has not dented the shekel much and today it was trading around 3.43 to the U.S. dollar today, up 0.9 percent this year and close to historic lows seen during the global financial disruptions in January 2018, July 2014 and June 2011.
     Since the start of 2019 the shekel has risen almost 10 percent against the U.S. dollar.
     Against the euro, the shekel has been hitting record highs since mid-2019 and was trading around 3.72 to the euro today, up 4.3 percent this year and up 16 percent since the start of 2019.
     Israel's economy has been growing around its long-term rate in recent months and gross domestic product grew 3.8 percent in the fourth quarter of last year, up from 3.5 percent in the third quarter.
     BOI said data from January point to continued growth but the interim budget is expected to have a "markedly contractionary effect" in the first half of 2020.

Israel maintains rate but still sees steady or lower rate

    Israel's central bank left its key interest rate steady at 0.25 percent, as expected, and confirmed its guidance that it "will be necessary to leave the interest rate at its current level for a prolonged period or to reduce it" to ensure inflation stabilizes around its the midpoint of its target range.
    The Bank of Israel (BOI), which has maintained its rate since raising it in November 2018 for the first time since 2011, added its monetary policy committee "is taking additional steps as necessary to make monetary policy more accommodative," a reference to its intervention in foreign exchange markets to weaken the strong shekel.
     Israel's shekel rose in 2019, prompting expectations last year the central bank would cut rates to stem further gains.
     Instead, BOI in November opted to intervene in the foreign exchange markets to weaken the shekel and boost inflation and has bought more than $3.5 billion of foreign currency since Nov. 25, 2019.
     In response to today's policy decision, the shekel weakened 0.3 percent to 3.47 to the U.S. dollar after rising 8.3 percent in terms of an effective exchange rate in 2019, "a development that continues to make it difficult to return inflation to the target range," BOI said.
     Underlining the BOI's dovish policy stance, its research staff lowered its forecasts for economic growth and inflation in 2020, and forecast the key interest rate would be between 0.25 percent and 0.1 percent in the coming year before gradually rising toward the end of 2021.
     Israel's inflation rate dropped to a lower-than-expected 0.3 percent in November from 0.4 percent in October and BOI lowered its forecast for inflation to be 1.0 percent in 2020, down from its previous forecast of 1.2 percent but up from 0.4 percent in 2019.
     BOI targets inflation of 1.0 to 3.0 percent.
     Economic activity in Israel last year was better than BOI had expected, with gross domestic product up an estimated 3.3 percent, on strong public and private consumption.
     BOI lowered its forecast for 2020 growth to 2.9 percent from October's forecast of 3.0 percent, and forecast 3.2 percent growth in 2021.
     BOI said the government's interim budget is expected to have a "markedly contractionary effect" in the first half of this year and there is continuing uncertainty about budgets after that.
     "Global economic activity continues to slow, but its seems that the risks of a significant deterioration have declined in view of progress in the trade negotiations between the US and China and the results of the UK elections," BOI said, adding additional monetary easing by major central banks "has reached its limits at this stage."

Saudi Arabia, Kuwait, Bahrain, UAE, Qatar, Jordan, Hong Kong, Macao cut rates 25 bps

    The eight central banks of Saudi Arabia, Bahrain, Kuwait, Qatar, the United Arab Emirates, Jordan, Hong Kong and Macao lowered their benchmark interest rates by 25 basis points, tracking their U.S. Federal Reserve's similar-sized cut in its federal funds rate.
     The Saudi Arabian Monetary Authority (SAMA) cut its repurchase rate and the reverse repo rate by 25 basis points to 2.25 percent and 1.75 percent, respectively.
     It is the third cut by SAMA this year, mirroring the Fed's three rate cuts in July, September and today.
    The Central Bank of Bahrain (CBB) cut its key policy rate, the one-week deposit facility rate, to 2.25 percent, the overnight deposit rate to 2.0 percent, the one-month deposit rate to 2.60 percent and the lending rate to 4.0 percent.
     It is CBB's second rate cut this year, with the rate being cut in July and today, but not in September.
     Saudi Arabia, Bahrain, UAE, Qatar and Jordan peg their currencies to the U.S. dollar while Kuwait's dinar is linked to a basket of currencies, including the dollar.
     The Central Bank of Kuwait (CBK) lowered its discount rate by 25 basis points to 2.75 percent, its first change in rates since a hike in March 2018. It is the first rate cut since October 2012.
     CBK said the decision fulfills the dual objective of promoting non-inflationary economic growth and ensuring the attractiveness of the national currency.
     "A healthy margin in favor of the KWD against the USD allowed for a discount rate cut that maintains the attractiveness of the national currency," Governor Mohammad Y. Al-Hashel said, adding the lower lending cost should drive credit take-off, motivate demand and support non-oil growth.
    The Qatar Central Bank cut its three main rates by 25 basis points, lowering the benchmark lending rate (QCBLR) to 4.25 percent, the deposit rate (QCBDR) to 2.0 percent and the repurchase rate to 2.0 percent, "taking into account the evolving domestic and international macroeconomic developments."
    The Central Bank of Jordan (CBJ) also cut interest rates on its monetary policy instruments by 25 basis points, saying this was "in response to the recent trends in the interest rates in the regional and international markets, and the positive outcomes witness by the Jordanian balance of payments, particularly national exports, tourism receipts and the continues flow of workers's remittances, which contributed positively to foreign reserves."
    The CBJ's main rate now stands at 4.0 percent, the re-discount rate at 5.0 percent, the overnight deposit window rate at 3.25 percent and the rate on repurchase agreements at 4.75 percent.
    CBJ added the rate cut was also aimed at catalyzing growth of credit and promote domestic spending, both consumption and investment, which should have a positive effect on economic growth.
    CBJ left its rate on its refinancing program that targets small and medium sized projects at 1.75 percent for projects in Amman and for 1.0 percent for projects in other areas.
     This program has provided funds for 1,125 projects at a total investment of 760 million Jordanian dinars, helping create some 11,200 new jobs, CBJ said.
     The Central Bank of United Arab Emirates (CBUAE) also said it would lower the rate on its certificates of deposits and the repurchase rate on short-term borrowing liquidity by 25 basis points in line with the Fed's decision.
     CBUAE's deposit rate is its main instrument for transmitting monetary policy to the banking system and the rate now stands at 2.50 percent.
     The rate cuts by central banks in the Mideast were later followed by the Hong Kong Monetary Authority (HKMA) and the Monetary Authority of Macao (AMCM), both of which lowered their benchmark rates by 25 basis points to 2.0 percent, respectively.
    The Hong Kong dollar is pegged to the U.S. dollar and Macao's pataca is linked to the Hong Kong Dollar.

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Egypt cuts rate 150 bps as inflation continues to decline

     Egypt's central bank cut its key interest rates by a further 150 basis points and said the "pace and magnitude of future policy adjustments will continue to be subject to confirmation that inflation expectations are anchored at target levels that are consistent with disinflation and price stability over the medium term."
     The Central Bank of Egypt (CBE) cut its overnight deposit rate, the overnight lending rate, the rate on its main operation and the discount rate by 150 basis points each to 14.25 percent 15.25 percent, 14.75 percent and 14.75 percent, respectively.
     CBE has now cut its key rates by a total of 250 basis points this year following a cut in February and by a total of 450 basis points since February 2018 when it shifted into an easing cycle in response to slowing inflation following a surge after the exchange rate of the pound was floated in November 2016 as part of an agreement with the International Monetary Fund (IMF).
      "As incoming data continued to confirm the moderation of underlying inflationary pressures, the MPC (monetary policy committee) decided to cut the policy rates by 150 basis points," CBE said, adding this was consistent with its aim of lowering inflation to its target of 9.0 percent, plus/minus 3 percentage points by the fourth quarter of 2020.
      Egypt's inflation rate fell to 8.7 percent in July from 9.4 percent in June and 14.1 percent in May but the central bank cautioned the path for future policy rates is based on inflation expectations rather than current inflation rates and future rate changes are based on confirmation that inflation expectations are anchored to its target level.
     The larger-than-expected drop in July inflation to the lowest rate in almost four years surprised analysts who had expected inflation to rise following a cut to subsidies that pushed up fuel prices. But it also ignited expectations the central bank would cut its rates by at least 100 basis points today.
      CBE said the fall in inflation was supported by a containment of inflationary pressures and by favorable base effects as the recent fiscal consolidation measures were weaker than in the previous year.
      Egypt's economy is estimated to have expanded by 5.7 percent in the second quarter of this year, up from 5.6 percent in the first quarter, and by 5.6 percent in fiscal 2018/19, the highest rate in 11 years while unemployment is continuing to declined.

Israel holds rate, confirms 'gradual and cautious' hikes

       Israel's central bank kept its key interest rate at 0.25 percent, as expected, and confirmed its guidance from January that "the rising path of the interest rate in the future will be gradual and cautious" to help stabilize inflation around the midpoint of its target range and support economic activity.
      The Bank of Israel (BOI), which surprised many analysts by raising its rate by 15 basis points in November last year - the first rate hike since June 2011 - added Israel's economy returned to its long-term growth rate in the fourth quarter of last year after slowing in the second and third quarters.
     Israel's economy grew 0.7 percent in the fourth quarter of 2018 from the third quarter with annual growth of 2.67 percent for estimated 2018 growth of 3.2 percent.
      In January the BOI lowered its 2019 growth forecast to 3.4 percent from 3.6 percent and forecast 3.5 percent growth for 2020. The central bank's composite index of the economy rose 0.28 percent in January for the highest reading since August 2018, driven by a rebound in manufacturing.
     But inflation remains near the lower bound of BOI's target range of 1.0 to 3.0 percent, rising to 1.2 percent in January from 0.8 percent in December and is expected to hover near this level in coming months.
     Boosted by BOI's rate hike, the shekel has risen since late December, with BOI saying if this rise continues it could delay inflation's rise toward the midpoint of its target.
     The shekel was trading at 3.6 to the U.S. dollar today, up 4.4 percent this year.
     Last month BOI forecast 1.3 percent inflation this year and 1.8 percent in 2020, with bank staff forecasting the key rate to rise once in the third quarter to end 2019 at 0.50 percent and another hike in the first quarter of 2020 to end the year at 1.25 percent.

Egypt cuts rate 100 bps after hitting first inflation target

     Egypt's central bank cut its key interest rates by a 100 basis points, its first cut in 11 months, saying its first inflation target for the end of 2018 had been achieved and fresh data continue "to confirm the moderation of underlying inflationary pressure."
     This is the Central Bank of Egypt's (CBE) third rate cut since February 2018 and the overnight deposit rate has now been lowered by 300 basis points since then as inflation has fallen.
     The rate cut brings CBE's overnight deposit rate to 15.75 percent, the overnight lending rate to 16.75 percent, the rate on its main operation and discount rate to 16.25 percent.
      CBE said its rates remain consistent with tight real monetary conditions and achieving its inflation target for the fourth quarter of 2020 and price stability in the medium term.
      While some analysts had expected the CBE to cut its rate due to the recent decline in inflation, other analysts expected the central bank to remain on hold for longer, citing a recent tick up in core inflation and the continued adjustment of prices to the government's ongoing cut to subsidies and tax increases in connection with the International Monetary Fund's US$12 billion aid package.
      The CBE noted headline and core inflation rose in January but this was due to an unfavorable comparison.
      In January Egypt's headline inflation rose to 12.7 percent from 12.0 percent in December while core inflation, which excludes some volatile food items, rose to 8.6 percent from 8.3 percent.
      The rate cut follows CBE's decision in December to lower its inflation target to an average of 9.0 percent, plus/minus 3 percentage points, for the fourth quarter of 2020 from its previous target of 13 percent, plus/minus 3 percentage points, for the fourth quarter of 2018.
      While inflation has been declining, Egypt's economy has been improving since the November 2016 agreement with the IMF and gross domestic product growth rose to 5.5 percent in the fourth quarter of last year from 5.3 percent while unemployment fell to 8.9 percent, the lowest since December 2010.
     As part of its reforms agreed with the IMF, the government is targeting a primary surplus of 2.0 percent of GDP in fiscal 2018/19, up from a preliminary 0.1 percent last year, a move the IMF on Feb. 5 said appeared to be on track and this would achieve a cumulative fiscal adjustment of 5.5 percent of GDP in 3 years.
     Earlier this month the CBE received a US$2 billion fifth tranche of its IMF loan.
     In its statement, the IMF said Egypt's economic outlook remains favorable and the recent rise in inflation reflected temporary increases in food and energy but "a restrictive monetary policy stance has helped reverse the increase and keep core inflation well anchored."
     For the current fiscal year, which ends July 1, the IMF forecast inflation will average 15.8 percent and then ease to 12.8 percent in 2019/20 from 20.9 percent in 2017/18.
     Egypt's GDP is seen growing 5.5 percent in 2018/19, up from 5.3 percent in 2017/18, and 5.9 percent in 2019/20.
     After a plunge in November 2016, the Egyptian pound has been trending firmer and rose in late January and has continued to rise this month.
      Today the pound was trading at 17.54 to the U.S. dollar,  2.1 percent higher than at the start of this year.
     As part of the government's reforms, the CBE in November 2016 floated the pound, which quickly lost more than half its value, boosting import prices and inflation.
     The impact of higher fuel, electricity and tobacco prices from the subsidy cuts and higher import prices boosted Egypt's inflation rate to almost 33 percent in July 2017 while the central bank then raised its rates by a further 200 basis points to 18.75 percent the same month.
     By February 2018, the CBE became confident inflation had peaked and was falling so it was able to cut its rate twice in succession by a total of 200 basis points. But since April the rate was on hold.

Egypt holds rate, lowers inflation target to 9% by Q4 2020

      Egypt's central bank left its key interest rates unchanged, as expected, and lowered its inflation target to an average of 9.0 percent, plus/minus 3 percentage points, during the fourth quarter of 2020, from the target of 13 percent for the fourth quarter of this year, which was set in May 2017.
      The Central Bank of Egypt (CBE), which has maintained its rates since March, added that exogenous factors outside the scope of monetary policy may lead to temporary deviations from the new inflation target that was set as inflation continues to gradually decline.
       The CBE kept its overnight deposit rate, the overnight lending rate and the rate on the main operation at 16.75 percent, 17.75 percent and 17.25 percent, respectively. 
      Egypt's headline inflation rate eased to 15.7 percent in November from 17.7 percent in October due to a favorable comparison and the partial reversal of a rise in some vegetable prices.
      Core inflation fell to 7.9 percent in November from 8.9 percent in October, the lowest rate since February 2016.
     "Current policy rates and the inflation outlook remain in line with achieving the targeted disinflation path," CBE said, adding it will not hesitate to adjust its policy stance to achieve its mandate of price stability.
       Inflation in Egypt soared early last year and hit almost 33 percent in July 2017 in response to a rise in regulated prices, such as electricity, tobacco and other fees, as the government slashed subsidies to energy and raised taxes in connection with a US$12 billion International Monetary Fund (IMF) aid package.
       In addition, the CBE in November 2016 floated the pound, which quickly lost more than half of its value, boosting import prices and inflation.
      Analysts are not expecting the CBE to begin cutting its rate until inflation calms down after further government subsidy cuts next year.
      Egypt's economy has been growing steadily for the last 6 quarters with annual growth of 5.4 percent in both the second and first quarters.
       In the third quarter of this year, CBE said the unemployment rate had stabilized at 10.0 percent and while private domestic demand and net exports declined, public demand rose.
       The CBE also said Egypt's finance ministry was targeting a primary surplus of 2.0 percent of gross domestic product in the 2018/19 fiscal year, which began July 1, up from a preliminary 0.1 percent in the previous year, and to maintain this surplus thereafter.
      Since May Egypt's pound has been relatively steady and was trading at 17.89 to the U.S. dollar today, down 0.3 percent this year.

Israel holds rate as BOI staff push back rate hike to Q1

      Israel's central bank left its key interest rate steady at 0.10 percent, saying the "forces supporting an increase in inflation still prevail" while the bank's economists pushed back their forecast for the first rate hike in seven years to early next year.
     The Bank of Israel (BOI), which is slowly moving towards raising its rate for the first time since June 2011, added the inflationary environment had not changed markedly since the last monetary policy meeting and a possible sharp rise in in the shekel's exchange rate still presents the main risk to inflation becoming entrenched within its target.
      BOI's monetary committee repeated its guidance that it would maintain the accommodative policy "as long as necessary in order to entrench the inflation environment within in the target range."
     Israel's inflation rate eased to 1.2 percent in August from 1.4 percent in July but was still within the BOI's target range of 1.0 - 3.0 percent.
      In August five of the monetary committee members voted to maintain the rate - it has been steady since March 2015 - while one member voted for a 15 basis point rate hike, similar to the previous four decisions.
      According to the August minutes, the committee believes there is room to prepare markets for the possibility of higher rates but any increase in interest rates before inflation is entrenched within the target range may delay this process and ultimately slow the path of raising rates.
       Taking note of the recent decline in inflation, the central bank's research department pushed back its forecast for the BOI to raise its rate to the first quarter of next year to 0.25 percent from July's forecast for a rate hike in the fourth quarter of this year.
     "The deferral is slight because we assess that the moderate inflation of recent months is only transitory, and that the inflation rate will continue to increase at a pace similar to our assessment in July," the bank's research department said.
     By the third quarter of 2019 BOI staff expect the rate to be raised one more time to 0.5 percent.
     The forecast for inflation was also lowered slightly in light of lower than expected inflation and the rise in the shekel that was not expected.
     Inflation is forecast to be 1.5 percent by the end of 2019 but only 0.8 percent at the end of this year, down from 1.2 percent forecast in July.
     The forecast for economic growth was unchanged, with gross domestic product seen expanding 3.7 percent this year, up from 3.5 percent last year, and 3.6 percent in 2019, up from 3.5 percent.
     After falling from January to mid-August, Israel's shekel rose against the U.S. dollar until late September before easing again.
     Today it slipped in response to the bank's statement and was trading at 3.64 to the dollar, down 4.4 percent since the start of this year.

Israel maintains rate but moves step closer to hike

     Israel's central bank kept its key interest rate steady at 0.10 percent, as expected, but took another small step toward raising its rate for the first time in seven years by saying inflation now appeared to becoming entrenched within its target range, meeting its requirement for tightening monetary policy.
     While the Bank of Israel (BOI) reiterated its guidance that would keep its accommodative policy "as long as necessary in order to entrench the inflation environment within the target range," it added that inflation was now "moving toward entrenchment within the price stability target range."
      Today's statement about inflation is more confident than in July when it said inflation was "approaching" its target range, and supports last month's forecast by BOI staff that the key rate will rise to 0.25 percent this year and then 0.50 percent in 2019.
      The BOI has maintained its rate at 0.10 percent since wrapping up an easing cycle in March 2015 and last raised the rate in June 2011.
      Israel's inflation rate rose to 1.4 percent in July from 1.3 percent in June, within BOI's target range of 1.0 - 3.0 percent, and up from 0.5 percent in May.
      BOI acknowledged inflation was in the lower part of its target range and the main risk to inflation becoming entrenched within the range was a rise in the shekel's exchange rate.
      The shekel has weakened this year against the U.S. dollar although it has firmed in the last few weeks. Today the shekel was trading at 3.61 to the dollar, down 3.6 percent this year.
     In July BOI staff forecast that inflation would average 1.2 percent this year, up from 0.3 percent in 2017 and up from 1.1 percent previously forecast, and then rise further to 1.5 percent in 2019, up from 1.4 percent previously forecast.