Friday, September 16, 2011

Monetary Policy Week in Review - 17 September 2011

The past week in monetary policy saw 13 central banks review interest rate levels and monetary policy settings.  Those that changed rates were: Belarus +300bps to 30.00%, Kenya +75bps to 7.00%, and India +25bps to 8.25%.  Russia and Denmark also adjusted the bands of their deposit and lending rates, while holding their main rates steady.  The Banks that held rates unchanged were: Mauritius 5.50%, Mozambique 16.00%, Russia 8.25%, New Zealand 2.50%, Switzerland 0-0.25%, Georgia 7.50%, Latvia 3.50%, Denmark 1.55%, Sri Lanka 7.00%, and Chile 5.25%.  Also making headlines in central banking was the announcement from the ECB of joint US dollar liquidity operations as a move to augment European banking system liquidity.

Unsurprisingly, many central banks commented on the impact of global developments on their policy outlook; with the signs of slowing growth in the US and Europe and continued financial market volatility weighing on decisions.  However many emerging markets are still experiencing relatively buoyant economic conditions, as indicated in central bank statements in the past week.  A selection of key quotes from central bank monetary policy media releases are listed below:
  • Reserve Bank of India (increased 25bps to 8.25%): "The monetary tightening effected so far by the Reserve Bank has helped in containing inflation and anchoring inflationary expectations, though both remain at levels beyond the Reserve Bank's comfort zone... a premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance. Going forward, the stance will be influenced by signs of downward movement in the inflation trajectory, to which the moderation in demand is expected to contribute, and the implications of global developments."
  • Central Bank of Kenya (increased 25bps to 7.00%): "The Committee observed that inflation, exchange rate and money market volatility continued to pose a challenge to the economy. Specifically, the debt crisis in Europe continues to have a significant impact on the economy through the exchange rate volatility. Events in the USA and Europe are expected to continue affecting  the exchange rate, inflation and the economic recovery."
  • National Bank of Belarus (increased 300bps to 30.00%): "The consistent increase in the cost of borrowed money in the economy is intended to provide a further deterrent effect on customers' demand for credit resources of banks for the period of release on a single course.  At the same time, increasing the refinancing rate will be an additional factor in stimulating processes of savings in Belarusian rubles and reduce pressure on the exchange rate"
  • Reserve Bank of New Zealand (held OCR at 2.50%): "If recent global developments have only a mild impact on the New Zealand economy, it is likely that the OCR will need to increase. For now, given the recent intensification in global economic and financial risks, it is prudent to continue to hold the OCR at 2.5 percent."
  • Swiss National Bank (held rate at 0-0.25%): "The Swiss National Bank will enforce the minimum exchange rate of CHF 1.20 per euro set on 6 September with the utmost determination. It is prepared to buy foreign currency in unlimited quantities. It continues to aim for a three-month Libor at zero and will maintain total sight deposits at the SNB at significantly above CHF 200 billion."
  • Banco Central de Chile (held rate at 5.25%): "Domestically, output and demand figures show signs of moderation, in line with projections in the Monetary Policy Report. Labor market conditions are still tight and faster growth in nominal wages is observed. CPI inflation indicators have hovered around 3% y‐o‐y, while core inflation measures remain contained. Inflation expectations are close to the target."
  • Central Bank of Russia (held refi rate at 8.25%): "The decision was supported by the assessment of inflation risks and risks to the sustainability of economic growth, including those associated with the uncertainty of the outlook for global economic activity, as well as of current money market conditions and the dynamics of the factors affecting banking sector liquidity. Implemented decision aimed at narrowing the gap between interest rates on the Bank of Russia liquidity provision and absorption operations should contribute to restrain money market interest rates volatility regarding the risks of the shortage of the rouble liquidity in the banking sector."
  • Danmarks Nationalbank (held rate at 1.55%): "The interest rate reduction follows Danmarks Nationalbank's purchase of foreign exchange in the market. The short euro market rates have fallen and the spread to the equivalent Danish rates has tended to strengthen the Danish krone."

Looking at the central bank calendar, next week there are a number of European central banks meeting (Hungary, Turkey, Iceland, Czech Republic, Norway), no doubt they will make due reference to the developments in the Euro sovereign debt crisis.  Of course, the other key event on the radar is the US FOMC meeting on the 20th - Bernanke announced at Jackson Hole the meeting would be extended to 2 days to allow the FOMC to consider implementing QE3 or QE2.1.
  • HUF - Hungary (Magyar Nemzeti Bank) - expected to hold at 6.00% on the 20th of Sep
  • TRY - Turkey (Central Bank of Turkey) - expected to hold at 5.75% on the 20th of Sep
  • USD - USA (US Federal Reserve) - expected to hold at 0-0.25% on the 20th of Sep
  • ISK - Iceland (Central Bank of Iceland) - expected to hold at 4.50% on the 21st of Sep
  • CZK - Czech Republic (Czech National Bank) - expected to hold at 0.75% on the 21st of Sep
  • NOK - Norway (Norges Bank) - expected to hold at 2.25% on the 21st of Sep
  • ZAR - South Africa (South African Reserve Bank) - expected to hold at 5.50% on the 22nd of Sep


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