Saturday, February 23, 2013

Monetary Policy Week in Review – Feb. 23, 2013: Global policy still loose as 2 of 4 ease, but shift to neutral nearing

    Last week four central banks took monetary policy decisions with two banks (Turkey and Colombia) taking further steps to ease their stance while the other two (Thailand and Namibia) kept rates on hold, illustrating how monetary policy on a global scale remains accommodative despite fresh signs that the cycle of loose policy is nearing its end.
    Ultra-low interest rates in advanced economies continues to push funds toward higher yielding yet safe currencies, such as Turkey and Thailand, with Turkey’s central bank drawing on its arsenal to prevent capital inflows from boosting its currency and domestic assets while the economy is weak.
    But the main focus of last week was the Federal Reserve’s minutes from its January meeting that showcased the intensifying debate over how and when the Fed should exit from quantitative easing.
    While there is no doubt of the Fed’s commitment to easy money and questions over the economic impact of its latest asset purchase program, global financial markets are hyper-sensitive to any sign the program is coming to an end.
    The strong reaction of markets for the second month in a row to a debate over when to rein in quantitative easing illustrates the intense pressure on the Fed to choose its exit route carefully so it doesn’t destroy markets’ and consumers’ fragile confidence and derail the economic recovery.
    China’s move to drain funds from markets for the first time in eight months also served to remind financial markets of just how accommodative global monetary policy is - and has been for the last five years - and how the global shift to a more neutral policy is likely to be a recurring theme.
  Through the first eight weeks of this year, 77 percent of this year’s 69 policy decisions among the 90 central banks followed by Central Bank News have favoured unchanged rates compared with 19 percent of decisions favouring rate cuts. This ratio is steady from last week.
    While the overall global economy remains sluggish, the contrast between Colombia and Thailand shows how growth in Asia is continuing to pick up speed while the slowdown in most of South America has yet to ease its grip.
    Colombia’s central bank cut its key rate for the sixth time since it embarked on an easing cycle last July and is concerned that low inflationary expectations could become entrenched amid a weakening economy, a sign that further rate cuts are likely.
    The Bank of Thailand is facing the opposite situation with its economy growing faster than expected and growing inflationary pressures. It is among the handful of Asian central banks that may raise rates later this year to curtail inflation from a combination of strong domestic demand, growing exports and capital inflow that is pushing up its currency and adding further fuel to asset prices.
    Turkey’s creative and flexible monetary policy was once again on display this week as the bank tries to find the right balance between stimulating economic growth yet discouraging hot money from flowing into the country to take advantage of the relatively high interest rates.
    While the Central Bank of the Republic of Turkey eased its policy stance by cutting short-term rates, it combined this with a “measured tightening” of reserve requirements – a macroprudential measure - to limit capital inflows and excessive bank lending. Meanwhile, the benchmark interest rate, seen as a more heavy-handed tool, was left unchanged.
    The immediate effect was that the Turkish lira fell, showing that its nimble and multi-pronged policy is still paying off.
TURKEY EM 5.50% 5.50% 5.75%
THAILAND EM 2.75% 2.75% 3.00%
NAMIBIA 5.50% 5.50% 6.00%
COLOMBIA EM 3.75% 4.00% 5.25%

    NEXT WEEK (week 9) features only four scheduled central bank meetings, including Angola, Israel, Hungary and Trinidad & Tobago.
    Other events that financial markets will closely follow include Italy’s general election on Sunday and Monday and Federal Reserve Chairman Ben Bernanke’s scheduled testimony on Tuesday and Wednesday to the Senate Banking Committee.
COUNTRY MSCI          MEETING               RATE        1 YEAR AGO
ANGOLA 25-Feb 10.00% 10.25%
ISRAEL DM 25-Feb 1.75% 2.50%
HUNGARY EM 26-Feb 5.50% 7.00%
TRINIDAD & TOBAGO 28-Feb 2.75% 3.00%


Post a Comment