Friday, April 15, 2011

Monetary Policy Week in Review - 16 April 2011

A major feature of the past week was continued emerging market monetary policy tightening, but it wasn't all conventional interest rate hikes.  Of those that did increase rates were Chile +50bps to 4.50%, and Armenia +25bps to 8.50%.  Those that held rates steady after reviewing policy were: South Korea 3.00%, Indonesia 6.75%, Canada 1.00%, Rwanda 6.00%, Georgia 8.00%, and Mexico 4.50%.  Meanwhile Angola slashed rates 500bps to 20.00%, and Iran's central bank decreed that Iranian banks should lower their interest rates from 26-28% to 14-17%.  Elsewhere, Vietnam made a series of adjustments to reserve rates to stabalise its currency (the Dong), Sri Lanka raised its reserve requirements by 100bps, and the Singapore Monetary Authority adjusted its currency policy upwards in response to rising inflation.

So it was an interesting week on the monetary policy front.  Aside from the two outliers of Angola and Iran, much of the activity was related to emerging market policy tightening where, of 5 moves, 3 were non-interest rate related.  It is interesting that there has been a few non-interest rate policy moves, particularly as emerging market central banks bring interest rates to higher and higher levels.  But perhaps more interesting is the non-move by a couple of the Banks that held policy unchanged.  For example, Korea and Indonesia arguably could have, and maybe should have, raised rates given their respective inflation situations.  Indeed it is likely that those banks will tighten policy again soon, but it does reflect a due degree of caution that is being applied in the monetary policy inflation fight.  Many economies and central banks are fast approaching a danger zone in policy tightening, where the risk of a policy mistake, e.g. tightening too much, is rising.

There are no major central banks scheduled to review policy next week.  However the Reserve Bank of Australia is due to release its Board Minutes from the previous monetary policy review.  Likewise the Bank of England is due to release the Monetary Policy Committee meeting minutes from its previous decision, which will make for interesting reading given what the ECB did and the inflation situation in the UK.


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