Wednesday, January 26, 2022

Canada maintains rate but says rates need to rise

      Canada's central bank left its key interest rates steady but took another major step forward toward normalizing its monetary policy and raising interest rates rate by dropping its previous guidance that the economy still needs considerable monetary policy support and policy rates would be kept unchanged.
     The Bank of Canada (BOC) left its benchmark target for the overnight rate at the effective lower bound of 0.25 percent, unchanged since it was cut three times in March 2020 at the height of the COVID-19 pandemic.
     BOC also left its bank rate at 0.50 percent and the deposit rate at 0.25 percent.
     "With overall economic slack now absorbed, the Bank has removed its exceptional forward guidance on its policy interest rate," BOC said, paving the way for interest rate hikes as soon as its next meeting in March.
     At the press conference, BOC Governor Tiff Macklem added the emergency monetary measures that helped support the economy during the pandemic were no longer needed and interest rates will need to rise to control inflation.
    "Second, we want to clearly signal that we expect interest rates will need to increase," Macklem said, adding inflation will come down as the pandemic fades and conditions normalize.
     BOC said it was still in a phase of reinvesting in government bonds by keeping its overall holdings roughly constant, at least until it begins to raise the policy interest rate.
      At that point BOC - which in April last year began reducing its weekly bond purchases and then ended them in October - said it will consider "reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds."
      In recent years central banks have adopted forward guidance as a monetary tool to affect expectations and prices in financial markets, and BOC at its last policy meeting in December reiterated the economy still required considerable support and interest rates would be held at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is achieved.
     Since then it has become clear Canada's economy performed better than expected in the second half of last year and inflation is now at highs not seen for 30 years.
     "While COVID-19 continues to affect economic activity unevenly across sectors, the Governing Council judges that overall slack in the economy is absorbed, thus satisfying the conditions outlined in the Bank's forward guidance on its policy interest rate," BOC said, adding:
     "The Governing Council therefore decided to end its extraordinary commitment to hold its policy rate at the effective lower bound."
     The timing and pace of future rate increases will now be guided by the bank's commitment to achieving the 2.0 percent inflation target, within a range of 1-3 percent.
     BOC's step-by-step tightening of its monetary policy stance since April last year takes place against a backdrop of estimated growth of 4.5 percent in 2021 and the economy entered 2022 with considerable momentum, such as strong employment growth and a tightening labour market, that shows economic slack is absorbed.
     Although the Omicron variant of COVID-19 is weighing on economic activity, BOC said its impact is expected to be less severe and economic growth is expected to bounce back and remain robust, helped by consumer spending on services, exports and investment.
     BOC forecast economic growth in 2022 of 4.0 percent in its latest monetary policy report, down from 4.3 percent previously forecast, and about 3.5 percent in 2023, down from an earlier 3.7 percent.
     Inflation has remained above the upper limit of BOC's target range since April last year and rose to 4.8 percent in December, the highest since September 1991, and BOC expects inflation to remain close to 5 percent in the first half of this year due to persistent supply constraints and higher food and energy prices.
     But as these supply shortages ease, inflation is expected to decline to about 3 percent by the end of this year and gradually ease toward the target.
    "The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation," BOC said.
     BOC raised its forecast for 2022 headline inflation to 4.2 percent from an earlier 3.4 percent while the 2023 forecast was unchanged at 2.3 percent.

Tuesday, January 25, 2022

Hungary raises rate 8th time, will continue with hikes

     Hungary's central bank raised its benchmark interest rates for the 8th month in row and said it "will continue the cycle of interest rate hikes until the outlook for inflation stabilizes around the central bank target and inflation risks become evenly balanced on the horizon of monetary policy."
     The National Bank of Hungary, or Magyar Nemzeti Bank (MNB) in Hungarian, raised its base rate by a further 50 basis points to 2.90 percent and has now raised it 2.30 percentage points since it began a monetary tightening cycle in June last year.
     MNB also raised its other key rates by 50 basis points, putting the overnight deposit rate at 2.90 percent, the overnight and one-week collateralized lending rates at 4.90 percent.
     "Inflation risks warrant a further tightening of monetary conditions," the central bank's monetary council said, adding mitigating second-round inflation risks and driving expectations have necessitated continuing the rate hike cycle and in greater increments than in December, when it was raised 30 basis points.
      In addition to its base rate, which is decided monthly, MNB uses the weekly tender for its one-week deposit facility to respond quickly to short-term changes in financial market conditions and has raised this rate seven times since mid-November in response to the rise in inflation.
     At the last tender on Thursday, Jan. 20, the one-week deposit rate was maintained at 4.0 percent for the third week in a row.
     Although MNB said risks in financial markets had eased since December, it added the sharp increase in core inflation signaled an increase in "persistent inflationary pressures" and the base rate should catch up to the level of the one-week deposit rate in coming months.
     "Accordingly, the council will continue the cycle of base rate hikes at a monthly frequency and in larger increments than in December," with MNB adding it will also raise the one-week deposit rate.
     Hungary's headline inflation rate was steady at 7.4 percent in December from November - but the highest since 2007 - while the core inflation rate rose to 6.4 percent from 5.3 percent.
     The central bank targets inflation of 2.0 to 4.0 percent around a 3.0 percent midpoint.
     While headline inflation may have peaked in December, the central bank said it may begin to decline later than it had expected and core inflation is expected to pick up in coming months as companies reprice their goods amid strong demand to reflect higher commodity prices and wages.
     Hungary's economy grew throughout last year and MNB said 2021 growth may have exceeded the 6.3-6.5 percent level it projected in December as data suggest activity in the fourth quarter was strong.
     For 2022 the central bank forecast growth of 4.0-5.0 percent as domestic demand offsets the negative impact of disruptions in International production chains and rising commodity, crop and energy prices.
     An increase in the minimum wage during a tight labor market will also maintain rapid wage growth and in the second half of this year exports are expected to rebound as external markets and supply chains recover.

Singapore tightens policy 2nd time, inflation seen higher

     Singapore's central bank tightened its monetary policy stance for the second time in four months in an unscheduled decision, saying it considered it "appropriate to make another pre-emptive adjustment" at this juncture as the inflation outlook had shifted further upward amid the confluence of recovering global demand and persistent supply-side frictions.
     The Monetary Authority of Singapore (MAS), which targets the value of the Singapore dollar against a basket of currencies to control inflation, said it would "therefore raise slightly the rate of appreciation of the S$NEER policy band," while leaving the width of the band and level at which it is centered unchanged.
     "This move builds on the pre-emotive shift to an appreciating stance in October 2021 and is appropriate for ensuring medium-term price stability," said MAS, adding SN$NEER (the Nominal Effect Exchange Rate) had broadly appreciated within the upper half of the policy band in the last three months.
      MAS normally decides monetary policy twice a year,  in April and October, but on occasions it will take an off-cycle decision.
      The tightening in October also took most analysts by surprise but since then inflation has continued to accelerate and an expected increase in Goods and Services Taxes (GST) this year, which would pass-through to core inflation, raised expectations MAS would tighten policy in April.
      Singapore's all-items inflation rate rose to a 2021-high of 4.0 percent in December from 0.2 percent in January while MAS core inflation rose to 2.1 percent from 1.6 percent, driven by an increase in services inflation from higher airfares.
      For the full year, headline inflation rose to 2.3 percent from minus 0.2 percent while core inflation rose to 0.9 percent from minus 0.2 percent in 2020, MAS and the Ministry of Trade and Industry said Jan. 24.
     "There remain upside risks to inflation arising from the impact of pandemic-related and geopolitical shocks on global supply chains," said MAS, adding the domestic labour market has tightened and wage growth is above its historical average, which has boosted prices more than forecast.
     MAS said it expects core inflation to pick up further in the near term and could reach 3 percent by the middle of this year and raised its forecast for this year to 2.0-3.0 percent from 1.0-2.0 percent expected in October last year.
     It also raised the forecast for all-time inflation, or headline inflation, to 2.5-3.5 percent from an earlier forecast of 1.5-2.5 percent.
     In 2021 the economy of the city-state expanded at its fastest pace since 2010 as gross domestic product grew 7.2 percent after contracting 5.4 percent in 2020.
    For this year MAS said Singapore's economy remains on track to grow 3.0-5.0 percent, with the output gap turning slightly positive. 
    "Global economic prospects remain largely intact," MAS said, adding the Omicron variant may temporarily dampen some clusters of activity but was unlikely to derail the broader economic recovery.

Monday, January 24, 2022

Kazakhstan raises rate 4th time to lower inflation

     Kazakhstan's central bank raised its benchmark interest rate for the fourth time, saying it was continuing to tighten its monetary policy stance to reduce inflation expectations and bring inflation back into its target range of 4.0 to 6.0 percent by the end of 2022.
     The National Bank of the Republic of Kazakhstan (NBK) raised its base rate by a further 50 basis points to 10.25 percent and has now raised it 1.25 percentage points following rate hikes in July, September, October and today.
     After raising its rate sharply in March 2020 to curb inflation, NBK had to change course the following month due to the COVID-19 pandemic and cut its rate in April and July by a total of 3 percentage points.
     At its previous meeting in early December 2021, the bank's monetary policy committee maintained the rate due to a slowdown in inflation and uncertainty about the impact of the Omicron variant of COVID-19.
      However, NBK also said it would continue to tighten its policy stance "more decisively" if the decline in inflation and inflation expectations did not stabilize.
     "The internal situation, despite the presences of disinflationary precesses in recent months, is characterized by the presence of significant pro-inflationary risks both on the demand and supply side," NBK said, adding inflation continues to be elevated in most countries around the world.
     Kazakhstan's inflation rate eased for the second month to 8.4 percent in December from a 2021-high of 8.9 percent in September and October, helped by the government's anti-inflationary measures, which helped food inflation decelerate.
     However, the cost of other non-food items rose, with gasoline prices up 19.6 percent and diesel fuel up 46.5 percent.
     "The trajectory of core inflation points to the instability of the slowdown in inflationary processes," NBK said, adding most respondents in its survey still expect the current rise in prices to continue or accelerate in the next 12 months.
     To help lower inflation, the central bank said it had already withdrawn from programs that support the economy and confirmed it still expects inflation to decelerate to around 6.0 to 6.5 percent by end-2022.
     However, the central bank there may be an increase in inflationary pressures in the first quarter of this year due to the comparison with a relatively low base in the first half of 2021 and "in connection with the tragic events in Kazakhstan in early January this year."
      Protests and rioting broke out in the capital of Almaty in early January over fuel prices that only ended after the president declared a nationwide state of emergency and ordered security forces to shoot to kill without warning. The official death toll hit 225.


Saturday, January 22, 2022

This week in monetary policy: Kazakhstan, Pakistan, Hungary, Nigeria, Kenya, Canada, Mozambique, USA, Chile, South Africa, Malawi, Angola & Colombia

     This week - January 24 through January 29 - central banks from 13 countries or jurisdictions are scheduled to decide on monetary policy: Kazakhstan, Pakistan, Hungary, Nigeria, Kenya, Canada, Mozambique, United States, Chile, South Africa, Malawi, Angola 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 be accessed by clicking on This Week.

JAN 24 - JAN 29, 2022
KAZAKHSTAN24-Jan9.75%15:00009.00%         FM
PAKISTAN24-Jan9.75%10007.00%         EM
HUNGARY 25-Jan2.40%3000.60%         EM
NIGERIA25-Jan11.50%0011.50%         FM
KENYA26-Jan7.00%007.00%         FM
CANADA26-Jan0.25%10:00000.25%         DM
UNITED STATES26-Jan0.25%14:00000.25%         DM
CHILE26-Jan4.00%18:0012500.50%         EM
SOUTH AFRICA27-Jan3.75%2503.50%         EM
COLOMBIA28-Jan3.00%5001.75%         EM

Friday, January 21, 2022

10 rate hikes in 2022 as China continues to ease policy

      The synchronous easing of monetary policy in 2020 to prevent the COVID-19 pandemic from triggering a global recession has now unambiguously been replaced by diverging policies as China this week cut its benchmark interest rate for the second consecutive month while another three banks raised rates as they continue to claw back the extraordinary stimulus and normalize policy.
      During the third week of 2022, the central banks of Sri Lanka, Ukraine and Paraguay raised their interest rates again, boosting the number of rate hikes so far this year to 10, while Indonesia also began tightening its policy stance by raising the reserve requirement for banks in March, June and September.
      And while Norway - the first developed market central bank to raise rates in 2021 - kept its rate steady this week, it confirmed it was still on track to raise rates for the third time in March as the economy continues to improve despite the Omicron variant of COVID-19 and persistent inflationary pressures.
      But China, the first major economy to bounce back from the pandemic, this week lowered its Loan Prime Rate (LPR) for the second month in a row as authorities seek to strike the right balance between deflating a bubble in the property sector without causing a credit crunch and an economic downturn.

     During the past week - week 3 of 2022 - 10 central banks took monetary policy decisions, resulting in 4 changes to policy interest rates as rates were raised three times and cut once.
     Year-to-date central banks worldwide have taken 21 monetary policy decisions, with the policy rate lowered 3 times, the rate increased 10 times and the rate left unchanged 8 times.
     Cuts to interest rates thus account for 23.1 percent of the 13 changes to the policy rate so far this year, up from 22.2 percent the previous week.
      Rate increases account for 76.9 percent of all changes to the policy rate year-to-date, down from 77.8 percent in the previous week.
      10 central banks have raised their rates so far this year while 3 have cut rates.

     Democratic Republic of Congo, South Sudan and China.
     Poland, Uruguay, Argentina, Peru, Romania, Moldova, South Korea, Sri Lanka, Ukraine and Paraguay.
     In addition to raising or lowering the policy rate, central banks also change their monetary policy stance by other tools, such as raising or lowering banks' reserve requirements, asset purchases or changing foreign exchange rates.
     Last week (week 3 of 2022) central banks made 8 changes to their overall policy stance, including 4 changes to the policy rate.
     Year-to-date 14 central banks have made 18 changes to their monetary policy stance, with 3 moves aimed at easing the policy stance, or 16.7 percent of all changes, down from 20 percent of all changes.
      In comparison, in 2021 central banks took 50 steps toward easing their monetary policy stance, which accounted for 24.9 percent of all changes to monetary policy, whereas in 2020 monetary easing steps accounted for 96.3 percent of all changes to monetary policy.
     Rate cuts account for 20% of all changes to the monetary policy stance in 2022, compared with 8.5% in 2021.
     Decisions aimed at tightening the monetary policy stance account for 83.3 percent of all changes to monetary policy in 2022, up from 80 percent in the previous week but down from 87.0 percent in 2021.
      Interest rate increases account for 55.6 percent of all changes to monetary policy year-to -date, down from 70 percent in the previous week and down from 61.7% in 2021.
     11 central banks have tightened their monetary policy stance year-to-date while 3 central banks have loosened their policy stance.
      CUMULATIVE SIZE OF RATE CUTS 2022: 410 basis points
      CUMULATIVE SIZE OF RATE RISES 2022: 800 basis points

      NET CHANGE IN RATES 2022: +390 basis points

      GLOBAL MONETARY POLICY RATE: 5.55%, up 4 basis point since start of 2022.


     2021: 50 central banks tightened monetary policy and 27 eased, global net tightening by 23 central banks.
     2020: 10 central banks tightened monetary policy and 93 eased, global net easing by 83 central banks.
     2019: 17 central banks tightened monetary policy and 67 eased, global net easing by 50 banks
     2018: 43 central banks tightened monetary policy and 32 eased, global net tightening by 11 banks
     2017: 28 central banks tightened monetary policy and 34 eased, global net easing by 6 banks
     2016: 29 central banks tightened monetary policy and 46 eased, global net easing by 17 banks
     2015: 48 central banks tightened monetary policy and 34 eased, global net tightening by 14 banks



      EASING: Congo, South Sudan and China cut rates.
      TIGHTENING: Poland, Uruguay, Argentina, Peru, Romania, Moldova, South Korea, Sri Lanka, Ukraine and Paraguay raise rates. Indonesia to raise reserve requirement in 3 steps.


      DEVELOPED MARKETS: Central banks in developed markets have decided on monetary policy 3 times in 2022, with all 3 decisions ending in unchanged rates.

      EMERGING MARKETS: Central banks in emerging markets have decided on monetary policy 8 times in 2022, with 3 decisions by ending in rate hikes: Poland, Peru and South Korea.
     One decision, by China, ended in a rate cut and 4 decisions resulted in unchanged rates.

      FRONTIER MARKETS: Central banks in frontier markets have decided on monetary policy 4 times in 2022, with three decisions resulting in rate hikes: Romania, Sri Lanka and Ukraine.
     One decision ended with interest rates being maintained.

      OTHER MARKETS: Central banks in other markets have decided on monetary policy 6 times in 2022.
     4 central banks have raised rates: Uruguay, Argentina, Moldova and Paraguay.
     2 central banks have cut rates: Congo and South Sudan.

Paraguay raises rate 6th time but says outlook weaker

      Paraguay's central bank raised its monetary policy rate for the sixth consecutive month - becoming the 10th central bank to raise rates this year - but slowed the pace of monetary tightening sharply, citing a weaker economic outlook due to drought and the latest wave of the COVID-19 pandemic.
      The Central Bank of Paraguay (BCP) raised its monetary policy rate by 25 basis points to 5.50 percent and has now raised it a total of 4.75 percentage points in the last six meetings of its monetary policy.
      It was only the second time since August, 2021, when BCP began the current monetary tightening cycle, the rate was raised by 25 basis points and the policy rate is now back to its level in the 12 months from July 2016.
      Pointing to the downside risks from the recent rise in COVID-19 cases due to the Omicron variant, a unanimous policy committee said it "considered its appropriate to continue with the process of normalization of monetary policy, but with a moderation of the pace of adjustment."
      In August last year, when BCP began rolling back its five rate cuts in 2020, which totaled 3.25 percentage points, the rate was raised by 25 basis points.
     However, BCP quickly accelerated the pace of monetary tightening.
     In September 2021 the rate was raised 50 basis points and then in the following three months (October, November and December), the rate was raised 125 basis points each month.
     At its last policy decision in December, BCP said the spread of COVID-19 in the region was moderate but today it said there was now a rise in infections linked to the Omicron variant and this amounted to a downside risks to the prospects for economic growth this year in the region.
     And while the cases of COVID-19 have risen worldwide, BCP said the waves of the contagion and the death rate from the Omicron variant was lower that in previous waves and data for December confirmed an improvement in global output based on higher manufacturing but slower services output.
     BCP has forecast economic growth of 5.0 percent for 2021 and 3.7 percent for 2022.
     The monthly indicator of economic activity (IMAEP) grew 4.8 percent in November but the central bank said downside risks to economic activity, such as adverse weather and a deterioration of the health situation, had materialized in recent weeks.
     However, with the length of the latest waves of the virus expected to be of shorter and the level of vaccinations improving, BCP said the impact of Omicron could have less impact on economic activity, especially in the services sector.
     As far as the balance of risks, BCP pointed to the rise in oil prices and the impact of the U.S. Federal Reserve's "imminent" normalization of its benchmark interest rate, which could push up inflation.
     Countering this upward pressure, the central bank pointed to the weaker outlook for the domestic economy due to drought and pandemic.
     Inflation in land-locked Paraguay has decelerated since hitting 7.6 percent in October and dropped to 6.8 percent in December.

Thursday, January 20, 2022

Ukraine raises rate 6th time and ready to hike further

     Ukraine's central bank raised its main interest rate for the sixth time and said it "will continue the cycle of strengthening monetary policy and is ready to act decisively in the event of further implementation of pro-inflationary factors," such as an escalation of the conflict with Russia and further spikes in prices.
     The National Bank of Ukraine (NBU) raised its discount rate by 1 percentage point to 10.0 percent and has now raised it 4 percentage points since it began tightening its monetary policy stance in March 2021 in response to accelerating inflation amid improving demand and economic activity.
    "The realization of a significant number of pro-inflation risks requires strengthening the NBU's monetary policy to improve inflation expectations and ensure a steady reduction in inflation to 5%," the board of the central bank said.
     With economic growth expected to improve in 2022 from last year and inflation to be higher than previously forecast, NBU will keep monetary conditions "moderately tight" across its forecast horizon, adding the discount rate "will be at a level not lower than neutral" this year and following years.
     To strengthen the transmission of its policy and manage the surplus of liquidity in the banking system, NBU said it would raise the required reserve ratio on deposits in both hryvnia and foreign currencies by 2 percent in February, and would consider further measures in March.
     While the central bank said it would continue to use foreign exchange interventions to smooth excessive fluctuations, it added it would refrain from planned daily purchases of foreign currency in coming quarters to replenish its reserves, which amounted to US$5 million from August last year.
     Today's rate hike comes as inflation has eased in the last three months and fell to 10.0 percent in December from a 2021-peak of 11 percent in September, helped by record harvests, lower world food prices, a stronger exchange rate of the Hryvnia and past rate hikes.
     However, NBU said this decline was slower than expected and while it expects inflation to ease this year, it will first return to the 5 percent target in 2023 as energy prices remain higher than expected and rising incomes and stable consumer demand will restrain any slowdown in inflation.
     NBU raised its forecast for inflation in 2022 to 7.7 percent from 5.0 percent.
     Ukraine's economy grew around 3.0 percent in 2021 but the central bank lowered its forecast for growth this year to 3.4 percent from an earlier 3.8 percent due to the impact of expensive energy and the effect of the tensions with Russia, which continues to have some 100,000 troops by Ukraine's border.
      A new inflation report with updated forecasts will be published Jan. 27.
     "The key risks to the forecast remain Russia's escalation of the military conflict and a longer-than-expected price spike in the world," the bank said, adding prolonged geopolitical tensions can have a very negative effect on the expectations of citizens, businesses and investors.
     "It will also be a significant barrier to investment in the economy and make it more difficult to attract external financing," NBU said, adding in the event of a worsening of geopolitical risks, it would be ready to strengthen monetary policy.

Norway maintains rate but still eyes March hike

     Norway's central bank left its policy rate steady, as expected, but said it would "most likely" raise the rate in March as the upswing the country's economy had continued and underlying inflation had risen more than expected and was now close to the bank's inflation target.
     Norges Bank (NB) left its policy rate at 0.5 percent after raising it twice in the second half of 2021 (September and December) by a total of 50 basis points.
     "Based on the Committee's current assessment of the outlook and balance or risks, the policy rate will most likely be raised in March," said NB Governor Oeystein Olsen in a statement.
     In response to the COVID-19 pandemic, NB cut its rate three times and by a total of 1.5 percentage points to 0.0 percent and also slashed banks' countercyclical capital buffer by 1.5 percentage points to counter any tightening of banks' lending standards, which would amplify the economic downturn.
     But helped by the bounce-back in crude oil prices and the global economy, Norway's economy recovered swiftly in the second and third quarters of 2021, and headline inflation has topped the bank's 2.0 percent  target all year.
      In December last year, when NB raised its rate for the second time, it also raised the countercyclical capital buffer as of Dec. 31, 2022 and said it would most likely raise the rate again in March this year.
     Norway's headline inflation rate rose to a 2021-high of 5.3 percent in December, 2021, from 5.1 percent in November while the core inflation rate, which strips out tax changes and energy, rose to 1.8 percent from 1.3 percent.
    Norway's economy grew 5.1 percent year-on-year in the third quarter of 2021, down from 6.2 percent in the second quarter and while NB said higher COVID-19 infection rates had help back activity, unemployment appeared to be lower than it had forecast and relaxation of containment measures will likely contribute to a continued economic upswing.
     "Monetary policy is expansionary," the bank's monetary policy and financial stability committee said, adding:
    "In the Committee's assessment, the objective of stabilizing inflation around the target somewhat further out suggests that the policy rate should be raised towards a more normal level."
     NB publishes its monetary policy report four times a year - in March, June, September and December - and normally makes changes to its policy stance at the same time.

Wednesday, January 19, 2022

Sri Lanka raises rate 2nd time to ease demand

     Sri Lanka's central bank raised its key interest rates for the second time in six months and took further measures to boost foreign exchange reserves, saying these measures "will curtail the possible build-up of underlying demand pressures in the economy, which would also help ease pressures in the external sector, thus promoting greater macroeconomic stability."
     The Central Bank of Sri Lanka (CBSL) raised its Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 50 basis points each to 5.50 percent and 6.50 percent, respectively.
     The rates have now been raised by 1 percentage point since CBSL began tightening its policy stance in August 2021 when it began to roll back the five rate cuts in 2020 - which totaled 2.50 percentage points - in response to the impact of the COVID-19 pandemic which hit its economy and tourism sector hard.
     Sri Lanka's inflation rate has risen steadily this year and although CBSL said it expects the supply-driven price pressures to be transitory, it also said "the possible build-up of demand driven inflationary pressures may compel the adoption of proactive monetary policy measures, which will also help in managing inflation expectations."
     Sri Lanka's inflation rate accelerated in the last three months to 12.1 percent in December from 9.9 percent in November and 3.0 percent in January.
     Sri Lanka's tourism sector was already under strain from the Easter Sunday bombings in 2019, which killed 267 people, and the central bank has estimated the country lost about US$9 billion in tourism revenues from the pandemic.
     The rise in oil prices delivered another blow to the country's dwindling foreign exchange reserves and Sri Lanka has undertaken a series of initiatives to restructure loans and rebuild currency reserves.
     Today, CBSL took several other measures, including mandating all registered tourist businesses to accept foreign exchange only for services to visitors from abroad and extending the timeline for additional incentive payments for remittances of U.S. dollars until April 30 from January 31.
     "In keeping with this policy stance, the Central Bank expects a corresponding increase in interest rates, particularly in deposit rates, thereby encouraging savings, while discouraging excessive consumption, which also fuels imports," the central bank said.
      Sri Lanka's economy shrank by 1.5 percent year-on-year in the third quarter of last year, down from growth of 12.3 percent in the second quarter but CBSL said economic activity toward the end of last year appears to have gathered momentum, helped by vaccinations, and forecast 2021 growth of around 4.0 percent, up from a contraction of 3.6 percent in 2020.
     Last week Ajith Nivard Cabraal, the bank's governor, forecast growth of around 5.5 percent in 2022.

China cuts key interest rate 2nd month in a row

      China's central bank cut its benchmark interest rate for the second consecutive month, as expected, following a cut in the rate of its medium-term loans earlier this week and yesterday's pledge by its deputy governor the central bank would open its "monetary tool box" wider to avoid a collapse in credit.
     The People's Bank of China (PBOC) cut its one-year Loan Prime Rate (LPR) by a further 10 basis points to 3.70 percent and has now cut it 15 points in two months following a 5 point cut in December.
     It is PBOC's 7th cut in LPR since it was introduced as the benchmark rate in August 2019, with the rate now having been cut a total of 65 basis points, including two cuts in response to the COVID-19 pandemic in February and April 2020.
     PBOC today also cut LPR on loans of 5 years or more - which impacts the cost of mortgages - by 5 basis points to 4.60 percent, the first cut since April 2020.
     The cut in 1-year LPR in December 2021 was part of PBOC's four moves last year to ease its monetary policy stance as authorities seek to carefully deflate the property market without triggering a credit crunch amid slower economic growth and higher inflation. 
     In July and December last year PBOC cut the reserve requirement ratio for most financial institutions by a total of 1 percentage point and also issued 85.5 billion in low cost loans to encourage financial institutions to boost their support from small enterprises and accelerate the creation of a green financial system.
     Expectations about the cut in LPR were fueled earlier this week when PBOC on Jan. 16 cut the interest rate on 700 billion yuan of one-year medium-term lending facility (MLF) loans by 10 basis points to 2.85 percent, its first cut since April 2020.
      LPR is calculated by the major financial institutions as a spread to MLF and reflects the cost of credit by 18 banks to their best customers.
      In addition to the cut in MLF, PBOC on Jan. 16 also cut the borrowing cost of 7-day reverse repos by 10 basis points to 2.10 percent when offering 100 billion yuan in reverse repos.
     On Jan. 18 PBOC Deputy Governor Liu Guoqiang told a press briefing the central bank would roll out more policies to stabilize economic growth, front-load actions and make pre-emotive moves as it seeks to spur the economy and credit. 
     In the fourth quarter of last year China's gross domestic product slowed for the third quarter in a row to an annual rise of 4.0 percent from 4.9 percent in the third quarter, 7.9 percent in the second quarter and 18.3 percent in the first quarter.
     For 2021 China's GDP grew 8.1 percent.
     Inflation in China decelerated to 1.5 percent in December from 2.3 percent in November while producer prices decelerated to growth of 10.3 percent from 12.9 percent, with analysts saying the slowdown in inflationary pressures would give PBOC space to ease policy further.