Saturday, December 25, 2010

Monetary Policy Week in Review - 26 Dec 2010

The central banks of Hungary, Japan, Poland, the Czech Republic, Georgia, Uruguay, Russia, and China all announced monetary policy rate decisions in the past week. The main standout was the People's Bank of China, which raised interest rates 25bps, lifting the 1-year lending rate to 5.81% and the 1-year deposit rate to 2.75%. Another notable was Russia, which kept the refi rate at 7.75% but increased the overnight deposit rate by 25bps to 2.75%. Another interesting move was the Magyar Nemzeti Bank of Hungary which raised the benchmark 2-week interest rate 25bps to 5.75%, as a response to government policies - and to the protest of the government of Hungary, which is seeking to rein in the Bank. The other banks that announced decisions held steady for a range of reasons, taking a wait and see approach.

So in some sense the theme of the week was emerging markets tightening. China had already commenced tightening as inflation has recently spiked up (driven mostly by short term food price inflation), and the economy is rocketing along, Brazil and India have both been tightening too as the risks of overheating begin to outweigh the risks of maintaining growth. But Russia is the most recent one to join the tightening club in the emerging markets. So it will be interesting to watch over the next year how these large and powerful emerging markets manage monetary policy in the backdrop of rising inflation and strong growth; and there is a lot riding on them to get it right. There are no major central bank meetings scheduled for next week.


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