The European Central Bank’s
(ECB) move to cut rates and add liquidity reverberated through global financial
markets last week, pushing down the euro’s exchange rate and spurring expectations
that it will extend investors’ current appetite for international risk.
The ECB’s easing comes at a delicate time for global markets.
Fighting
in Iraq is threatening the country’s collapse and there are clear signs that U.K. rates will
be raised sooner than expected. This has led to speculation that the Federal
Reserve - which this week is expected to further reduce asset purchases - could also raise rates earlier than expected.
Without a fresh dose of
liquidity in global financial markets by the ECB, investors’ nerves could be
tested, with the Reserve Bank of New Zealand’s rate rise last week serving as a timely reminder that the days of ultra-low interest rates ultimately will
come to an end.
But for now, the days of
risk-on in global financial markets look to be extended, with the central
banks of Serbia and Macedonia last week welcoming the ECB’s move as helping
reduce global risks.
The Bank of Serbia, which cut
its rate for the second time this year, said the ECB’s easing “should have a
positive impact on liquidity in the international capital markets.”
The National Bank of the
Republic of Macedonia, which maintained its rate, said the ECB rate cut had
increased the spread between its own currency and the euro, “raising the
attractiveness of the domestic currency.”
Through the first 25 weeks of
this year, central banks have now cut their policy rates 26 times, or 11.6
percent of this year’s 225 decisions by the 90 central banks followed by Central
Bank News.
This is essentially unchanged from 11.7
percent the previous week but up from 10.6 percent at the end of May and 9.6
percent at the end of April, showing how the global trend has shifted toward lower
rather than higher interest rates as the global economy has performed weaker than
expected.
The ECB’s rate cut, and notably the negative nominal deposit rate and other accommodative measures, is the
latest confirmation of how central banks can still find ways to boost liquidity
and lower market rates despite policy rates at essentially zero.
But the ECB’s easing, along with the
Bank of Japan’s (BOJ) continued quantitative easing, is merely postponing the
inevitable tightening of global monetary policy.
The United States continues to whittle down
its asset purchases as it slowly moves toward a rate rise and the timeline for
a rate rise in the United Kingdom has now pulled forward following Bank of
England Governor Mark Carney’s warning on Thursday that the first rate hike
“could happen sooner than markets currently expect.”
New Zealand’s central bank last
week raised its rate for the third time in a row and surprised markets by
signaling it would continue to tighten despite expectations that it would pause
due to a fall in commodity prices and the strong New Zealand dollar.
With New Zealand’s rate rise,
central banks in advanced economies now account for 3 of this year’s 20 rate
rises, or 15 percent. Emerging market central banks have raised rates 10 times,
frontier market central banks only once and central banks in other markets 6
times.
Rate rises account for 8.9
percent of this year’s 225 policy decisions, down from 9.2 percent end-May and
10.8 percent end-April.
LIST OF LAST
WEEK’S CENTRAL BANK DECISIONS:
- Iceland holds rate but may raise, resumes FX purchases
- New Zealand raises rate 25 bps, sees inflation pressure
- Korea maintains rate, inflation to rise but low for now
- Indonesia holds rate, sees inflation hitting target
- Serbia cuts rate 50 bps, sees no inflation from floods
- Macedonia holds rate, sees positive FX impact from ECB
- Chile holds rate, still mulling cuts despite inflation rise
- Peru holds rate, sees inflation declining
- Mozambique maintains rate, inflation reflects cool season
TABLE WITH
LAST WEEK’S MONETARY POLICY DECISIONS:
| COUNTRY | MSCI | NEW RATE | OLD RATE | 1 YEAR AGO |
| ICELAND | 6.00% | 6.00% | 6.00% | |
| CROATIA | FM | 5.00% | 5.00% | 6.25% |
| NEW ZEALAND | DM | 3.25% | 3.00% | 2.50% |
| MACEDONIA | 3.25% | 3.25% | 3.50% | |
| SERBIA | FM | 8.50% | 9.00% | 11.00% |
| INDONESIA | EM | 7.50% | 7.50% | 6.00% |
| KOREA | EM | 2.50% | 2.50% | 2.50% |
| CHILE | EM | 4.00% | 4.00% | 5.00% |
| PERU | EM | 4.00% | 4.00% | 4.25% |
| JAPAN | DM | N/A | N/A | N/A |
| MOZAMBIQUE | 8.25% | 8.25% | 9.00% |
This week (Week
25) 10 central banks will decide on monetary policy, comprising the countries
of Russia, Morocco, Sri Lanka, Thailand, the United States, Georgia, Namibia,
the Philippines, Switzerland and Norway.
TABLE WITH
THIS WEEK’S MONETARY POLICY DECISIONS:
| COUNTRY | MSCI | DATE | CURRENT RATE | 1 YEAR AGO |
| RUSSIA | EM | 16-Jun | 7.50% | 8.25% |
| MOROCCO | FM | 17-Jun | 3.00% | 3.00% |
| SRI LANKA | FM | 18-Jun | 6.50% | 7.00% |
| THAILAND | EM | 18-Jun | 2.00% | 2.50% |
| UNITED STATES | DM | 18-Jun | 0.25% | 0.25% |
| GEORGIA | 18-Jun | 4.00% | 4.00% | |
| NAMIBIA | 18-Jun | 5.50% | 5.50% | |
| PHILIPPINES | EM | 19-Jun | 3.50% | 3.50% |
| SWITZERLAND | DM | 19-Jun | 0.25% | 0.25% |
| NORWAY | DM | 19-Jun | 1.50% | 1.50% |
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