Saturday, August 3, 2013

Monetary Policy Week in Review – Jul 29-Aug 2, 2013: 3 banks cut, weak currencies limit India, Tunisia options

    This week 14 central banks took policy decisions, with three banks (Albania, Egypt and Macedonia) cutting rates in response to weak economic growth while 11 banks held rates steady, including India and Tunisia where weak currencies limited their ability to ease policy.
    The currencies of most emerging markets, especially those with large current account deficits, weakened sharply in May and June as capital flowed out in response to the Federal Reserve’s plan to reduce asset purchases.
    The immediate consequence was that rate cuts were off the agenda as Indonesia, Turkey, India, and to a lesser-degree Brazil, tightened policy in recent weeks to protect their currencies and prevent the pass-through of higher import prices to inflation.
    The Reserve Bank of India (RBI) was candid and direct in explaining how the weak rupee and the current account deficit was making it impossible to continue a policy of easing to stimulate economic growth, the same unfortunate situation that the South African Reserve Bank is facing.
    The Central Bank of Tunisia also mentioned the “worrying level” of its current account deficit and a further decline in the dinar against the euro against along with sluggish growth that is threatening this year’s growth targets in its argument for holding rates steady.

    The Central Bank of Egypt’s 50 basis point rate cut was the surprise of the week as it comes only four months after rates were raised and rising inflation, the very reason that rates were raised in March. At that time, Egypt's central bank had also warned that it would not hesitate to adjust rates further to ensure price stability.
    But the removal of Egyptian President Mohamed Mursi from power in early July, along with fresh aid from Gulf Arab states, has been accompanied by a new determination to get the struggling economy back on track.
    The rate cut implies that the central bank does not expect a further weakening of the pound, a major concern in the past because the central bank wanted to ensure that funds flowed into the country.
    The Egyptian pound has been weakening since early 2010 with the depreciation picking up speed early this year. But since early June the pound appears to have stabilized and in fact strengthened slightly after the rate cut, quoted at 6.99 to the U.S. dollar today compared with 7.02 at the start of July. Over the year, however, the pound is still down 9 percent against the dollar.
    But this week’s policy meetings by the U.S. Federal Reserve, the European Central Bank (ECB) and the Bank of England (BOE) dominated global financial markets though there was not much new information generated.
    The other central banks that maintained rates this week include those from Israel, Angola, the Czech Republic, Zambia, Ghana and Bulgaria.
    As expected, there were no fireworks from the Federal Reserve, which didn’t give further hints about when it may start to taper its asset purchases, the main issue that has roiled global financial markets since late May. The Fed was not scheduled to hold a press conference this week, one of the reasons that financial markets were not expecting major policy initiatives.
    But one of the changes in the Fed’s statement was the use of the word “modest” to describe the economy’s expansion in the first half of the year compared with “moderate” that was used in previous months to describe the economy’s pace.
    Another change was a reference to the risk to the economy from persistently low inflation, but this was largely interpreted as a nod to St. Louis Fed President James Bullard who has often voiced his concern over low inflation and repeatedly spoken in favor of continued asset purchases until inflation is around the Fed’s 2.0 percent target.
    The Fed’s preferred inflation measure, the personal consumption expenditure index, rose to 1.3 percent in June from 1.1 percent in May.
    The BOE also held off from changing policy this week, keeping its asset purchase target unchanged, as expected. But next week promises to be interesting as the BOE, under the new stewardship of Mark Carney from the Bank of Canada, will publish its view on thresholds and forward guidance.
    Last month the BOE adopted a form for forward guidance – essentially an outlook for policy rates - by saying the recent rise in market interest rates, and the implied rise in its own policy rates, was not warranted. Next week this policy is likely to become formalized with a change in policy rates is linked to certain thresholds, whether this will be unemployment and inflation, as in the United States.

    The issue of forward guidance was also of keen interest during the ECB’s press conference after rates, as expected, were maintained. Another topic of interest was the publication of minutes of ECB council meetings with a formal proposal to be presented in the fall.
    As the Fed, the ECB tweaked its language about the economy, adding that confidence had shown some improvement from low levels and this “tentatively confirm the expectation of a stabilisation in economic activity.”
    Hardly a ringing endorsement of a sudden resurgence of growth but the euro zone has a long way to go with the economy this year projected to shrink by 0.6 percent and expand by 1.1 percent in 2014.
    But ECB President Mario Draghi’s press conference was dominated by details over forward guidance, which the ECB also adopted last month, when it said “the Governing Council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time.”
     The ECB clearly broke with tradition by giving such a guidance, though it will not define what it means by “extended period of time,” making its guidance much less specific than other central banks, for example Sweden’s Riksbank which releases likely rate paths.
    It was almost as if the ECB regretted using forward guidance last month, saying it may not actually repeat this outlook each month if financial markets and journalists understand that the guidance is valid until further notice.
    Omitting the guidance would thus not imply a change in the ECB’s outlook, only when the wording of the guidance is changed. And any change in the guidance would be linked to the ECB’s description of inflation, the state of the economy and monetary dynamics.
   Draghi’s argument was that it if the guidance was repeated every month, markets would infer that “extended period” referred to one month and that was not the council’s intention.
    Financial markets and economists will certainly face a new set of challenges when trying to grasp the ECB’s outlook in coming months.
    Through the first 31 weeks of this year 24.3 percent, or 73, or this year’s 300 policy decisions by the 90 central banks followed by Central Bank News have led to rate cuts, largely steady from last week’s 24.1 percent decisions, but down from 24.6 percent the previous week.
    Only 4.7 percent, or 14, of this year’s rate decisions have led to rate rises.


ANGOLA 10.00% 10.00% 10.25%
ISRAEL DM 1.25% 1.25% 2.25%
INDIA EM  7.25% 7.25% 8.00%
TUNISIA FM 4.00% 4.00% 3.50%
GHANA 16.00% 16.00% 15.00%
UNITED STATES DM 0.25% 0.25% 0.25%
ALBANIA 3.50% 3.75% 4.00%
ZAMBIA 9.75% 9.75% 9.00%
EURO AREA DM  0.50% 0.50% 0.75%
UNITED KINGDOM DM 0.50% 0.50% 0.50%
CZECH REPUBLIC EM  0.05% 0.05% 0.50%
EGYPT EM 9.25% 9.75% 9.25%
MACEDONIA 3.25% 3.50% 3.75%
BULGARIA FM 0.02% 0.02% 0.08%

    Next week (week 32) 10 central banks are scheduled to hold policy meetings, including Romania, Australia, Rwanda, the Philippines, Japan, South Korea, Serbia, Peru, Russia and tentatively Sri Lanka.
    In addition, The Bank of England is scheduled to release its inflation report along with its assessment of using forward guidance and thresholds on Aug. 7.

COUNTRY MSCI              DATE               RATE        1 YEAR AGO
ROMANIA FM 5-Aug 5.00% 5.25%
AUSTRALIA DM 6-Aug 2.75% 3.50%
RWANDA 6-Aug 7.00% 7.50%
PHILIPPINES EM 7-Aug 3.50% 3.75%
JAPAN DM 8-Aug                   N/A 0.10%
KOREA EM 8-Aug 2.50% 3.00%
SERBIA FM 8-Aug 11.00% 10.50%
PERU EM 8-Aug 4.25% 4.25%
SRI LANKA (TENTATIVE) FM 8-Aug 7.00% 7.75%
RUSSIA EM 9-Aug 8.25% 8.00%


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