Friday, January 27, 2012

Monetary Policy Week in Review - 28 January 2012

The past week in monetary policy saw 2 central banks cutting interest rates (Israel -25bps to 2.50%, and Thailand -25bps to 3.00%), and 1 bank cutting its reserve ratio (India cut CRR 50bps to 5.50%).  Meanwhile 7 central banks held rates unchanged (Japan 0.10%, India 8.50%, Hungary 7.00%, Turkey 5.75%, New Zealand 2.50%, USA 0-0.25%, and Hong Kong 0.50%).  The week also featured the US Federal Reserve announcing an inflation target of 2 percent and releasing its inaugural economic forecasts as part of its efforts to improve transparency.

Following are some of the key quotes and comments from the banks that met, often these comments give an insight into how the central bankers are thinking and how their economies are faring.
  • US Federal Reserve (Held rate at 0-0.25%): "To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy.  In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."
  • Reserve Bank of India (Held rate at 8.50%): "In reducing the CRR, the Reserve Bank has attempted to address the structural pressures on liquidity in a way that is not inconsistent with the prevailing monetary stance. In the two previous guidances, it was indicated that the cycle of rate increases had peaked and further actions were likely to reverse the cycle. Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature to begin reducing the policy rate."
  • Bank of Japan (Held rate at 0.10%): "Japan's economic activity has been more or less flat, mainly due to the effects of a slowdown in overseas economies and the appreciation of the yen.  As for domestic demand, business fixed investment has been on a moderate increasing trend and private consumption has remained firm.  On the other hand, exports and production have remained more or less flat, due to the slowdown in overseas economies and the yen's appreciation as well as the remaining effects of the flooding in Thailand.  Meanwhile, although global financial markets remain under heavy strain, financial conditions in Japan have continued to ease."
  • Bank of Israel (cut rate 25bps to 2.50%): "The decision to cut the interest rate to 2.5 percent for February is consistent with the interest rate policy aimed at keeping inflation within the price stability target range and is intended to support real economic activity, against the background of the slowdown in global demand."
  • Bank of Thailand (cut rate 25bps to 3.00%): "The MPC assessed that inflationary pressure remains contained, while headwinds from the global economy continue to pose  risks to Thailand's economic growth. The MPC therefore voted unanimously to reduce the policy rate by 0.25 percent, from 3.25 percent to 3.00 percent per annum, effective immediately. With  private sector confidence improving but still fragile, this policy accommodation should help accelerate the return of economic activity to normal levels."

Looking at the central bank calendar, the week ahead is relatively quiet with just a handful of emerging market and frontier market central banks meeting to review policy settings.  Aside from central bank meetings, there will be further European summits on the debt crisis, and the release of high frequency economic indicators such as the Purchasing Manager's Index (PMI) for many countries.  The week also features FOMC Chairman, Ben Bernanke, testifying before the House Budget Committee - this will be watched by many for any clues of further quantitative easing.
  • MNR - Malaysia (Bank Negara Malaysia) expected to hold at 3.00% on the 31st of Jan
  • COP - Colombia (Bank of Colombia) expected to hold at 4.75% on the 31st of Jan
  • NGN - Nigeria (Central Bank of Nigeria) expected to hold at 12.00% on the 31st of Jan


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