Monetary Policy Week in Review - 4 Dec 2010

This week saw interest rate reviews from a variety of economies, including some key emerging Asia economies, but also one of the biggest developed economic regions. Those that hiked rates included: Pakistan +50bps, Hungary +25bps, Thailand +25bps, and while it didn't review the Selic rate, the Banco Central do Brasil increased the reserve requirements on term deposits to 20% from 15%, and demand deposits to 12% from 8% in effort to address rising inflation and overheating risks. Meanwhile those that held rates included: Saudi Arabia, Vietnam, Congo, Indonesia, and the EU. The European Central Bank also noted in its announcement that it would slightly delay its exit from some of the extraordinary policy measures, and disappointed the markets by not deciding to initiate any asset purchase programs like that of the US federal reserve.

So in terms of themes, the trend of tightening of monetary policy in the fast growing emerging economies continued this week. There was even some criticism that Vietnam and Indonesia should have raised rates given the inflation challenges they face. But of course the emerging market central banks are also dealing with pressures around hot capital flows as their interest rates become more attractive relative to the one and the quarter percent's of the large developed economies. It is likely that emerging markets will continue to lead the developed markets on monetary policy tightening in the year ahead. Speaking of developed markets, next week will be a busy monetary policy week; the Reserve Bank of Australia, the Bank of Canada, the Reserve Bank of New Zealand, and the Bank of England all meet to review policy, with no changes expected.

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