Friday, January 13, 2012

Monetary Policy Week in Review - 14 Jan 2012

The past week in monetary policy saw interest rate decisions announced by 11 central banks, with just one announcing a change in rates (Chile -25bps to 5.00%).  Those that held rates unchanged were: Sri Lanka 7.00%, Poland 4.50%, Kenya 18.00%, the EU 1.00%, UK 0.50%, Indonesia 6.00%, South Korea 3.25%, Mozambique 15.00%, Peru 4.25%, and Armenia 8.00%.  Also making the news during the week in central banking was reports that Iran's central bank had raised interest rates, and the resignation of Swiss National Bank Chairman, Philipp Hildebrand.

Following are some of the key quotes from the central banks that announced monetary policy decisions over the past week:
  • European Central Bank (held rate at 1.00%): "Inflation is likely to stay above 2% for several months to come, before declining to below 2%. At the same time, the underlying pace of monetary expansion remains moderate. As expected, ongoing financial market tensions continue to dampen economic activity in the euro area, while, according to some recent survey indicators, there are tentative signs of a stabilisation in activity at low levels. The economic outlook remains subject to high uncertainty and substantial downside risks. In such an environment, cost, wage and price pressures in the euro area should remain modest and inflation rates should develop in line with price stability over the policy-relevant horizon."
  • Banco Central de Chile (dropped rate 25bps to 5.00%): "Domestically, output and demand have evolved in line with forecasts in the latest Monetary Policy Report. The labor market is still tight. The money market has normalized, while financing conditions for some agents are tighter than a few months ago. December's headline and core inflation was higher than expected due to the prices of perishables and other foods and the lagged incidence of the peso depreciation in the fourth quarter of 2011. Inflation expectations remain near the target."
  • Bank Indonesia (held rate at 6.00%):  "Board of Governors views that current BI rate is still consistent with inflation targets, financial system stability, and remains conducive to propel domestic economic expansion amidst global economic uncertainty. In 2011, Indonesian economy showed strong performance with low inflation, higher economic growth, stable exchange rate, and stable financial system. The achievement was supported by various policies implemented by Bank Indonesia and the government."
  • Bank of Korea (held rate at 3.25%): "In Korea, exports have kept up their steady increase, but domestic demand has been subdued with consumption and construction investment decreasing from the previous month. On the employment front, the number of persons employed has sustained its large scale of increase, led by the private sector. The Committee anticipates that domestic economic growth will gradually return to its long-term trend level going forward, after remaining subdued for some time due mostly to the impact of external risk factors."
  • National Bank of Poland (held rate at 4.50%): "In the opinion of the Council, in the medium term inflation will be curbed by gradually decelerating domestic demand amidst fiscal tightening, including reduced public investment spending, and interest rate increases implemented in the first half of 2011, as well as the expected global economic slowdown. The impact  of the situation in the global financial markets on zloty exchange rate together with a possible rise in commodity prices continues to be an upside risk to domestic price developments."

Looking at the central bank calendar, the week ahead is largely dominated by emerging market central bank action. However it is likely that only Brazil will make a move, likely cutting another 50 basis points. But these banks will likely be wary of the external environment, particularly financial market stress emanating from the Eurozone. Elsewhere the European Central Bank will release its monthly report on Thursday.
  • CAD - Canada (Bank of Canada) expected to hold at 1.00% on the 17th of Jan
  • BRL - Brazil (Banco Central do Brasil) expected to cut 50bps from 11.00% on the 18th of Jan
  • PHP - Philippines (Central Bank of Philippines) expected to hold at 4.50% on the 19th of Jan
  • ZAR - South Africa (South African Reserve Bank) expected to hold at 5.50% on the 19th of Jan
  • MXN - Mexico (Banco de Mexico) expected to hold at 4.50% on the 20th of Jan


  1. Surprised there aren't more banks cutting rates, Europe seems grim, and global growth is slowing...

  2. I wonder if we will see any central bank action next week in response to the S&P downgrades of various EU sovereigns. Perhaps the ECB will step up its bond buying programs? Interesting times ahead...