Policy Review

      The final week of 2021 ended with another central bank raising its interest rate, boosting the number of rate hikes to 124 - a sharp contrast to 2020s 13 rate hikes and 256 rate cuts - as central banks in 41 countries tightened monetary policy to ensure inflationary pressures, ignited by an economic recovery amidst bottlenecks in global supply chains, remain under control.
      The central bank of the Dominican Republic in the Caribbean took the honor as the final monetary authority to raise its rate in 2021, illustrating how universal the trend toward monetary tightening was.
      During 2021 central banks took 557 monetary policy decisions, with only 12 percent of all decisions that ended in a change to interest rates leading to a rate cut. (17 rate cuts)
      In contrast, 89 percent of all rate changes resulted in rate increases as central banks from Mozambique in Southern Africa to Norway and Iceland in Northern Europe began to unwind the monetary stimulus unleashed in 2020 during the initial waves of the COVID-19 pandemic.
      One of the distinguishing features of central banks' response to the pandemic was the use of a vast array of monetary tools - including asset purchases, reserve requirements or low cost loans in addition to rate cuts - to prevent financial and banking systems from freezing up.
      But with economies worldwide bouncing back, central banks are now gradually normalizing their monetary policy stance by rolling back these easing measures. But the process is slow and fraught as financial markets have become accustomed to easy monetary conditions.
      The global monetary policy rate, or the average interest rate of 104 central banks, ended the year at 5.51 percent, up 1.3 percentage point from end-2020, but remains below 5.69 percent at the end of 2019 and 6.42 percent at the end of 2018.
       Below is an overview of monetary policy changes, month-by month, in 2021 followed by changes to monetary policy as carried out by central banks in developed markets, emerging markets, frontier markets, and other markets:


      EASING: China cuts reserve requirement, main interest rate and offers low-cost green loans, Taiwan rolls over special credit facility for banks by 6 months,Turkey cuts rate, ECB to increase monthly asset purchases in Q2 and Q3, 2022, Japan extends special Covid-19 financing 6 months, UAE extends several economic support measures and Saudi Arabia extends deferred payment program.
      TIGHTENING: Moldova, Georgia, Poland, Brazil, Ukraine, Poland, Pakistan, Armenia, Hungary, Chile, Costa Rica, Norway, United Kingdom, Mexico, Azerbaijan, Russia, Colombia, Jamaica, Paraguay, Czech Republic, Sierra Leone and Dominican Republic raise rates. 
      USA to reduce asset purchases by $30 billion a month, ECB to end pandemic asset purchases in March 2022 and Japan to end additional purchases of CP and corporate bonds end March, 2022, as scheduled.

      EASING: Turkey cuts rate.
      TIGHTENING: Australia discontinues yield target on 3-year government bond, the US begins to reduce monthly asset purchases by $15 billion, Hungary ceases using FX swaps to provide forint liquidity and to use new discount bills to help sterilize liquidity, and makes interest rate corridor asymmetric by raising overnight deposit, lending and one-week lending rates.
      The following 18 banks raise rates: Poland, Czech Republic, Romania, Mexico, Uruguay, Peru, Jamaica, Hungary, Iceland, South Africa, Pakistan, Ghana, Paraguay, Lesotho, New Zealand, Zambia, Dominican Republic, South Korea and Kyrgyzstan raise rates. 

      EASING: Uganda lets credit relief measures expire but continues with interventions for those sectors that remain under lockdown and liquidity assistance maintained, and Turkey cuts rate.
      TIGHTENING: Romania, Moldova, Uruguay, New Zealand, Iceland, Poland, Peru, Chile, Hungary, Paraguay, Russia, Tajikistan, Kazakhstan, Brazil, Zimbabwe, Azerbaijan and Colombia raise rates. Serbia raises rate on reverse repo auctions and cancels repo auctions, Kuwait starts unwinding crises measures, Singapore raises slope of S$ policy band and Canada ends quantitative easing.

      EASING: Australia extends weekly bond purchases of $4B by 3 months, Mozambique lowers reserve requirement, Saudi Arabia extends deferred payment program, and Turkey and Denmark cut rates.
      TIGHTENING: Moldova, Ukraine, Peru, Russia, Kazakhstan, Armenia, Azerbaijan, Pakistan, Hungary, Paraguay, Brazil, Norway, Czech Republic, Mexico, Jamaica and Colombia raise rates, ECB reduces asset purchases in Q4 moderately, UAE starts gradual and well-calibrated withdrawal of extraordinary stimulus measures, Iceland raises countercyclical capital buffer and caps debt service-to-income ratios and Dominican Republic starts normalization of monetary policy.

      EASING: Liberia
      TIGHTENING: Armenia, Georgia, Brazil, Czech Republic, Uruguay, Mexico, Peru, Sri Lanka, Paraguay, Hungary, Iceland, South Korea and Chile raise rates. Czech Republic also raises countercyclical capital buffer.

      EASING: China cuts required reserve ratio for all banks, Fiji increases size of disaster and rehabilitations containment facility and Seychelles cuts minimum reserve requirement.
      TIGHTENING: Angola, Chile, Belarus, Ukraine, Russia, Kazakhstan, Kyrgyzstan, Hungary, Tajikistan and Moldova raise rates, Israel ends business loan program, Australia trims weekly bond purchases from September, New Zealand ends asset purchases, and Canada trims weekly bond purchases.

      EASING: ECB to purchase assets under PEPP at significantly higher pace in Q3 that in first months of year, Japan extends COVID-19 special financing program 6 months until end-March, 2022, Uganda, Democratic Republic of Congo and Seychelles cut rates, Saudi Arabia extends Covid-19 financing support program for micro, small and medium enterprises and Fiji lowers interest rate on disaster and rehabilitation containment facility.
      TIGHTENING: Russia, Armenia and Brazil raise rates, Ukraine phases out Covid-19 crises measures, Hungary raises rate and closes crises lending program Funding for Growth Go!, and Czech Republic and Mexico raise rates.

      EASING: India provides liquidity to health sector, including vaccine and oxygen producers, and launches a second round of government bond purchases in Q2 FY22 and Ghana cuts rate.
      TIGHTENING: Armenia, Brazil and Iceland raise rates, Kyrgyzstan reduces excess liquidity in banking system to limit inflationary pressures, Czech Republic raises countercyclical capital buffer, and US Fed winds down corporate bond portfolio.
      EASING: Congo and UAE extends pandemic loan program, and Moldova cuts reserve requirements (twice)
      TIGHTENING: Belarus, Ukraine, Russia, Kyrgyzstan, Georgia and Tajikistan raise rates and Canada reduces asset purchases.

      EASING: United States extends Paycheck Protection Program 3 months, Moldova cuts reserve requirement, Brazil extends temporary cut in reserve requirement, ECB to purchase assets under PEPP at significantly higher pace in Q2, Congo and North Macedonia cuts rates and Mongolia adds further longer-term refinancing.
      TIGHTENING: Ukraine raises key rate, Belarus suspends permanent liquidity facility to strengthen control of monetary base and money supply to limit inflation, Georgia raises key rate, United States to cease regular purchases of agency commercial mortgage-backed securities, Brazil raises rate, Turkey raises rate, Russia raises rate and Angola raises rate on liquidity absorption facility.

      EASING: Australia boosts purchases of government bonds $100 billion, Mexico cuts its key interest rate, Uganda extends credit relief and liquidity measures and Indonesia cuts its rate.
      TIGHTENING: Armenia raises policy rate, Tajikistan raises policy rate and reserve requirements that were cut temporarily last year from April 1 to Dec. 31, 2020, Zambia raises rate, Zimbabwe raises rate, Kyrgyz Republic raises rate and Turkey raises reserve requirement.

      EASING: Romania cut its key rate, Israel announced how much foreign exchange it would purchase in 2021 to deal with the rise in the shekel and thus support the economy while Costa Rica increased the size of its special medium-term lending facility.
      TIGHTENING: Mozambique raised its key interest rate due to rising inflation while Angola's central bank began to levy a fee on banks' excess liquidity as it begins to implement a more restrictive monetary policy.

     DEVELOPED MARKETS: Central banks in developed markets decided on monetary policy 84 times in 2021, with 4 banks raising rates 6 times: Denmark raised its rate in a technical adjustment while Norway (twice), New Zealand (twice) and United Kingdom raised rates to tighten policy stance. Australia discontinued its bond yield target.
      One bank, Denmark, also cuts its rate to defend the peg with the euro.
      The other 77 decisions have ended with unchanged rates. 

     EMERGING MARKETS: Central banks in emerging markets decided on monetary policy 181 times in 2021, with 53 decisions by 13 central banks ending in rate hikes: Turkey (four times) Brazil (seven), Russia (seven), Hungary (seven), Czech Republic (five), Mexico (five), Chile (four), Peru (five), South Korea (twice), Pakistan (three), Colombia (three), Poland (three) and South Africa.
     Seven decisions ended in rate cuts (Mexico, Indonesia, Turkey (four) and China), and 121 decisions ended in unchanged rates.

      FRONTIER MARKETS: Central banks in frontier markets decided on monetary policy 77 times in 2021, with 2 banks cutting rates (Romania and Ghana) and 5 banks raising rates 12 times: Ukraine (five times), Kazakhstan (three), Sri Lanka, Romania (twice) and Ghana.
      The other 63 decisions resulted in unchanged rates.
      OTHER MARKETSCentral banks in other markets decided on monetary policy 213 times in 2021, with 19 banks raising rates a total of 53 times: Mozambique, Angola, Armenia (six times),Tajikistan (four), Zambia (twice), Zimbabwe (twice), Kyrgyzstan (four), Belarus (twice), Georgia (four), Iceland (four), Moldova (four), Uruguay (three), Paraguay (five), Azerbaijan (three), Jamaica (three), Lesotho, Dominican Republic (twice), Costa Rica and Sierra Leone.
     Rates have been cut 7 times by 5 banks: Congo (three times), North Macedonia, Uganda, Seychelles, and Liberia.
     The other 153 decisions resulted in unchanged rates.

      REVIEW OF 2020:
      The final week of 2020 ended with no central banks changing their policy stance but the last communique of the year - from the Dominican Republic - captured what promises to be the major economic shifts in 2021: rising inflation from higher food and commodity prices and a strong rebound in economic growth.
      At this point the uniform message from central banks worldwide is that the ultra-loose monetary policy stance will remain in place as long as COVID-19 threatens economic activity.
     However, cracks in the easy global monetary policy stance are beginning to appear.
     Four central banks already tightened their policy stance in the second half of 2020 - South Sudan, Argentina, Turkey (twice) and Armenia - while Norway's central bank pulled forward the date of its first rate hike, and the U.S. Fed and Taiwan have raised their growth outlooks.
     In China and South Korea, countries that weathered the pandemic better than most countries, financial markets are already looking ahead to a normalization of monetary policy.
     And stock markets worldwide have surged in the expectation the global economy will bounce back, boosted by the roll-out of vaccines and trillions of U.S. dollars in stimulus.
     How inflation responds to the expected release of pent-up demand - if vaccines succeed in defeating the virus - and the rise in commodity prices on the back of a weaker U.S. dollar is thus critical in determining the state of monetary policy in 2021.
     Until vaccines take effect, central banks will remain cautious and continue the overwhelming trend of 2020, illustrated by the most recent decisions by the Bank of Japan and the ECB to extend their support programs.

     Looking back at 2020, central banks cut key interest rates an astounding 256 times compared with only 13 rate hikes, with most of the cuts in March as central banks marshaled a wide range of tools to avoid a global depression.
     The global monetary policy rate (GMPR), the average interest rate by 99 central banks worldwide, plunged 1.51 percentage points this year to 4.18 percent from 5.69 percent at the end of 2019, 6.42 percent at end-2018 and 5.99 percent at end-2017.
     Policy rates in 18 central banks have been slashed to essentially zero - 0.25 percent or lower - leaving quantitative easing (QE) as the only way forward to loosen monetary conditions further.
    Thirty central banks began purchasing assets, both government and private securities, along with a flurry of other measures to loosen policy as the number of steps taken to ease monetary policy this year amounts to 417.
      Prior to the outbreak of the pandemic and the near-shutdown of all global economic activity in March and April, QE was mainly used by central banks in advanced economies as an extraordinary tool when interest rates had been cut to the lower bound or in extreme circumstances such as wars.
     The Fed, the ECB, the BOJ and BOE are estimated to have expanded their balance sheets by an estimated $8 trillion in 2020.
    Central bank's easing measures also extended to reserve requirements, which were cut 41 times, in some cases multiple times by the same central bank, while macro prudential measures have been loosened in synch with massive injection of liquidity to ensure banks and financial systems remain healthy so they can help engineer an economic recovery.
     Countercyclical capital buffers or capital adequacy ratios, for example, were cut by 12 central banks.
      Illustrating the speed with which central banks moved to counter the large, negative impact on economic activity from measures to contain the Covid-19 virus, interest rates were often cut at unscheduled meetings by monetary policy committees.
     In 2020 interest rates were cut at 78 extraordinary policy meetings and other easing measures were taken at a further four policy meetings.
    On top of this unprecedented easing by central banks, governments worldwide also injected trillions of dollars into their economies, boosting budget deficits by up to $11 trillion in 2020 and global debt loads even further to limit the economic impact of the pandemic.

     Prior to the resurgence of COVID in November, central banks were beginning to take their foot of the stimulus pedal, with the pace of rate cuts easing to 3 in October from 10 in September, 9 in August,14 in July, 23 in June, 26 in May, 34 in April, and an astounding 91 cuts in March.
     But with governments seeking to curtail the spread of the pandemic by restricting the movements of its citizens, economic activity in the fourth quarter is taking a hit.
     The number of rate cuts in November rose to 11 and in December rates were cut 3 times.
     In contrast central banks have only raised their rates 13 times but three of those (Czech Republic, Kyrgyzstan and Tajikistan) came pre-COVID-19 and two (Denmark and Kazakhstan) during the volatility at the height of the COVID crises to protect their exchange rates.
    In total central banks have taken 16 steps to tighten their monetary policy this year as compared to 417 easing steps, i.e. policy has been tightened 26 times as often as loosened.
     While the number of 2020 rate cuts counted by Central Bank News includes those by Zimbabwe, Vanuatu, Papua New Guinea,Tanzania, Liberia and South Sudan, the total size of the cuts is not included in the global average interest rate for comparison purposes. 
     Taking into account the 13 rate hikes this year from the Czech Republic, the Kyrgyz Republic, Kazakhstan, Tajikistan, Denmark, Zimbabwe, Congo,Turkey (three hikes), Hungary (a non-benchmark rate), South Sudan and Armenia, policy rates have been cut by a net 15,533 
     But illustrating the threat to economic activity from the spread of COVID-19 and the measures to contain it, three of these banks - Kazakhstan, the Czech Republic and Tajikistan - reversed course after less than three months and started easing.
     The cumulative percentage of all changes by central banks to their policy stance that favored an easing of monetary policy last week rose slightly to 96.3 from 96.2 the previous week, continuing to remain above 90 percent since week 10 (March 1 to March 7) of this year.
    Since the end of January, when COVID-19 began to infect financial markets, central banks from tiny Vanuatu to the U.S. Federal Reserve have cut key interest rates 248 times.
    The damaging effect on the global economy from the virus began to slowly emerge and then accelerate after Jan. 23, when China's government imposed the "Wuhan Lockdown" on the industrial hub and city of 11 million people to contain the spread.
      Illustrating just how interwoven the global economy has become, Sri Lanka's central bank was the first central bank to refer to the coronavirus when it lowered its rate on Jan. 29, days before China's central bank on Feb. 3 began to pump in liquidity to the banking system at lower interest rates.
     Thailand's central bank then followed suit by cutting its rate on Feb. 5 and since then rate cuts have come at a fast and furious pace, spanning the globe from Mongolia to Mauritius.
      One central bank, Romania, cut its rate in January while no central banks have raised rates.


      Central banks worldwide haven taken 6 policy decisions in 2021, with policy rates cut once while there have been no rate rises.

      DEVELOPED MARKETS: Central banks in developed markets have decided on monetary policy once in 2021, with policy unchanged.

      EMERGING MARKETS: Central banks in emerging markets have decided on monetary policy 3 times in 2021 with no changes to policy.

      FRONTIER MARKETS: Central banks in frontier markets have decided on monetary policy 2 times in 2021, with one bank cutting its rate: Romania.

      OTHER MARKETS: Central bank in other markets have decided on monetary policy once in 2021, with no changes to policy.

      Central Bank News, which tracks the monetary policy stance of 104 central banks, publishes the following Global Monetary Policy Changes (GMPC), a country-by-country overview of changes to monetary policy. 
      GMPC aims to capture changes to a wide range of monetary policy instruments, not just key interests rates but also changes to reserve requirements, bond purchases or foreign exchange rates to understand whether the monetary conditions become tighter of easier.
      GMPC complements Central Bank News' other products, such as the Global Interest Rate Monitor (GIRM), which tracks official policy rates, and Global Monetary Policy Highlights (GMPH), which summarizes interest changes each month.
       GMPC includes an alphabetical list of countries with changes to their monetary policy.


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