Last week 11 central banks took
policy decisions with every single bank keeping rates on hold though Norway, as
Canada in January, delayed a planned rate rises due to lower inflationary
pressure from sluggish growth that continues to plague the global economy.
Norway’s decision illustrates
how central banks are uneasy with very low policy rates as they tend
to encourage risk taking and fuel asset bubbles. Yet, the central banks feel they
have little choice but to keep rates low with major downside risks dominating the global economy, keeping consumers and investors on edge and thus holding back demand and inflation.
In addition to Norway, the central banks of Mauritius, Mozambique, Kenya, Serbia, New Zealand, Korea, the Philippines,
Switzerland, Latvia and Russia kept rates on hold last week.
Through the first 11 weeks of the year, 78 percent of the 102 policy
decisions taken by the 90 central banks followed by Central Bank News lead to unchanged
rates, up from 76 percent after 10 weeks, strengthening this year’s trend
toward steady policy rates worldwide.
Globally, 19 percent of policy
decisions so far this year have lead to rate cuts, largely by central banks in emerging
economies, down from 21 percent after the first 10 weeks, a policy rates
continue to decline.
But the pace of rate cuts is
slowing as many central banks shift toward a more neutral stance to gauge the
impact of last year’s rate cuts.
Of last week’s 11 policy decisions,
seven were from central banks that cut rates last year, including Kenya and
Mozambique, among the most aggressive cutters
Oil-rich Norway is experiencing
growing household debt and house prices, and following a rate cut in March 2012, Norges
Bank started in June to prepare markets for higher rates as inflationary
pressures were expected to rise.
But last August it started to
push back the time frame for a rate rise and then in October a rate rise was delayed
until sometime this year. Now, a rate rise has been postponed until next spring as
inflation and economic growth remains lower than expected.
But Norwegian debt and house
prices continue to rise so the central bank, like New Zealand, is preparing to
introduce a counter-cyclical buffer in an attempt to rein in banks’ willingness
to extend credit and also strengthen banks' ability to withstand a crises.
While New Zealand’s strong
currency, drought and fiscal consolidation is restraining growth,
reconstruction after the 2010 Canterbury earthquake along with rising house
prices are creating upside risks. Seeking to strike the right balance, the
Reserve Bank of New Zealand said it expects to keep rates on hold through the
year.
Russia’s central bank struck a
less hawkish tone last week, dropping its previous statements that the risk of
a slowdown from tight money was minor and the economy was operating at close to
potential.
Instead, the Bank of Russia
noted slowing economic growth, strengthening the impression – already boosted
by the nomination of Putin aide Elvira Nebiullina as new bank president - that
rate cuts are on their way.
Switzerland also took note of
the lack of inflationary pressure, trimming its inflation forecast to continued
deflation this year and only a slight 0.2 percent rise in consumer prices next
year, maintaining downward pressure on the Swiss franc.
The contrast between Europe and
Southeast Asia remains stark.
Although the Bank of Korea
underlined the downside risks to global growth from Europe and the U.S., it is
looking ahead to rising inflation while the Philippines again cut rates on its
Special Deposit Account (SDA) in an effort to stem the inflow of foreign funds
and curb the rise in the peso.
Fueled by ample global
liquidity and low rates in advanced economies, many emerging markets with solid
economic fundamentals are adjusting their policy framework to stem the flow of
hot money yet still stimulate domestic growth.
Like Turkey in 2010, the
governor of Bangko Sentral ng Pilipinas told journalists that he is moving to an
interest rate corridor system to help manage capital flows which not only puts
upward pressure on currencies but also leads to asset bubbles.
New Zealand’s central bank
governor emphasized his concern over the strong kiwi dollar, warning markets
that he would cut rates if the currency rises more than justified by the
economic fundamentals.
Meanwhile, Serbia – the only
central bank worldwide to have raised rates this year in addition to Denmark – lived
up to expectations and held rates after eight rate hikes despite the continuing
rise in inflation.
Last month the National Bank of Serbia signaled that it was starting to soften its tightening stance due to an
expected drop in inflation, and this week it made good on that promise, saying
that the last four months show that inflation is easing.
LAST WEEK’S
(WEEK 11) MONETARY POLICY DECISIONS:
| COUNTRY | MSCI | NEW RATE | OLD RATE | 1 YEAR AGO |
| MAURITIUS | 4.90% | 4.90% | 4.90% | |
| MOZAMBIQUE | 9.50% | 9.50% | 13.75% | |
| KENYA | FM | 9.50% | 9.50% | 18.00% |
| SERBIA | FM | 11.75% | 11.75% | 9.50% |
| NEW ZEALAND | DM | 2.50% | 2.50% | 2.50% |
| SOUTH KOREA | EM | 2.75% | 2.75% | 3.25% |
| PHILIPPINES | EM | 3.50% | 3.50% | 4.00% |
| SWITZERLAND | DM | 0.25% | 0.25% | 0.25% |
| LATVIA | 2.50% | 2.50% | 3.50% | |
| NORWAY | DM | 1.50% | 1.50% | 1.50% |
| RUSSIA | EM | 8.25% | 8.25% | 8.00% |
Next week (week
12) features eight central bank policy decisions, including India, Nigeria, the
United States, South Africa, Iceland, Egypt, Chile and Trinidad & Tobago.
The U.S. Federal Reserve
changed the time for announcing policy decision to 2 p.m. Eastern Standard Time
from 2:15, with the press conference at 2:30 p.m.
| COUNTRY | MSCI | MEETING | RATE | 1 YEAR AGO |
| INDIA | EM | 19-Mar | 7.75% | 8.50% |
| NIGERIA | FM | 19-Mar | 12.00% | 12.00% |
| UNITED STATES | DM | 20-Mar | 0.25% | 0.25% |
| SOUTH AFRICA | EM | 20-Mar | 5.00% | 5.50% |
| ICELAND | 20-Mar | 6.00% | 5.00% | |
| EGYPT | EM | 21-Mar | 9.25% | 9.25% |
| CHILE | EM | 21-Mar | 5.00% | 5.00% |
| TRINIDAD & TOBAGO | 22-Mar | 2.75% | 3.00% |
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