Friday, July 1, 2011

Monetary Policy Week in Review - 2 July 2011

Over the past week there were 6 central banks announcing monetary policy decisions.  Only Kenya (+175bps to 8.00%), and Taiwan (12.5bps to 1.875) increased interest rates.  Meanwhile the central banks of Israel (3.25%), Albania (5.25%), Romania (6.25%), and Russia (8.25%) all held monetary policy settings unchanged.  Also of interest in central banking news was the announcement from the BIS [Bank for International Settlements] around increasing capital requirement regulations for globally systemically important banks.  The BIS also featured in the news as it stressed the need for central banks around the world to normalise monetary policy in order to promote sustainable economic growth.

Some of the common themes from the monetary policy statements included caution around the uncertain economic outlook, particularly within the global backdrop of heightened levels of sovereign debt risks.  There was also mention of the recent trends in commodity prices, with several key commodities turning down over the past quarter.  Another common concern was the growth outlook, both domestically, and globally; with the major economies of China and the US showing some weakness in recent economic indicators.

Following is a selection of the key quotes and comments from the central banks mentioned above. 
  • Bank of Israel (held interest rate at 3.25%): "In the first half of the year the Bank of Israel raised the interest rate markedly.  At the same time, steps were taken by the Bank of Israel and the Ministry of Finance in the housing market.  In addition, the shekel appreciated over recent months and there was a decline in commodity prices.  The impact on inflation of these items is expected to be felt in the future."
  • Bank of Albania (held interest rate at 5.25%): "inflation will continue to be under the pressure of foreign prices in the coming period,"..."but, barring unexpected developments, the effect of the shocks of foreign prices will wane while the effect of administered prices will cease in the third quarter".
  • Central Bank of Kenya (increased interest rate 175bps to 8.00%): "This further tightening of the monetary policy stance will curtail second-round effects arising from fuel and maize prices and exchange-rate volatility that have been fueling inflationary expectations,".
  • National Bank of Romania (held interest rate at 6.25%): "The inflation outlook continues to feature significant risks.  The developments in international commodity prices, the uncertainties related to the calendar and magnitude of administered price adjustments, the movements on global financial markets in the context of the evolution of the sovereign debt crisis, as well as the possible emergence of second-round effects from the supply-side shocks seen in the recent quarters remain a matter of concern."
  • Central Bank of the Republic of China (Taiwan) (increased interest rate 12.5bps to 1.875%): "Although the nation's inflation remains more stable than in most other countries, we have decided to maintain the pace in rate hikes to help control the public's prospective attitude toward consumer prices,".
  • Central Bank of Russia (held refinancing rate at 8.25%): "The decision was made following an assessment of inflation risks and risks for sustainable economic growth, including risks posed by the continued uncertainty over foreign market developments."

Next week is set to be a reasonably busy week in monetary policy, with rate hikes expected from 3 of the following central banks that are scheduled to review policy settings:
  • Australia (Reserve Bank of Australia) - expected to hold at 4.75% on 5th July
  • Sweden (Sveriges Riksbank) - possible 25bp increase from 1.75% on 5th July
  • Poland (National Bank of Poland) - expected to hold at 4.50% on 6th July
  • Malaysia (Bank Negara Malaysia)  - likely 25bp increase from 3.00% on 7th July
  • United Kingdom (Bank of England) expected to hold at 0.50% on 7th July
  • Eurozone (European Central Bank) expect 25bp increase from 1.25% on 7th July
  • Mexico (Banco de Mexico) expected to hold at 4.50% on 8th July


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