This week’s rate reduction by Israel and Turkey brings it to a total of five rate cuts in reaction to the BOJ’s new phase of monetary easing, which has lead to a drop in the value of the yen and raised fears of an accelerated influx of capital into higher-yielding currencies, threatening to create asset bubbles.
Prior to this week’s cuts, Australia and Korea had cut rates, specifically mentioning foreign exchange as part of their reasoning, while Turkey has now cut rates twice since the BOJ's announcement on April 4, in both cases pointing to strong capital inflows.
Israel’s move came as a complete surprise to markets, with the Bank of Israel (BoI) combining a 25 basis point cut with a plan to buy some $2.1 billion of foreign exchange this year to ease the pressure on the shekel from “the beginning of natural gas production from the Tamar gas field, the interest rate reductions by central banks worldwide, notably the ECB, and the continued quantitative easing programs in several major economies around the world."
The BoI’s intervention in foreign exchange markets follows news the previous week that the Reserve Bank of New Zealand (RBNZ) had intervened for the first time since 2007 to weaken its dollar and reports this week that Taiwan’s central bank has intensified its intervention in foreign exchange markets to prevent its dollar from rising too much and making its exports more expensive.
Since the BOJ announced its new policy, a total of 17 central banks have cut rates 18 times (Turkey twice) for a total reduction of 935 basis points. However, 13 of those cuts were not in direct response to the BOJ but rather in response to a continuing decline in domestic inflationary pressures and weak economic growth.
The cumulative rate cuts in response to the BOJ by Turkey, Australia, Korea and Israel amount to 175 basis points, still a considerable amount in the course of six weeks.
In addition to lowering their policy interest rates, central banks – especially in emerging markets - are drawing on other weapons in their arsenal, typically macroprudential measures, to respond to the twin challenge of slowing economic growth and capital inflows. Not only do capital inflows tend to push up the value of the currency and thus make exports more expensive, but they also boost local asset prices, such as property and equity prices above a sustainable level.
Thailand finds itself at the center of this issue, with a meeting last Monday between the Bank of Thailand’s (BoT) monetary policy committee, government and private sector representatives to discuss an adequate response.
The meeting, which was only been scheduled the week before, lead to speculation that the BoT would cut rates, but this did not occur. The BoT’s next scheduled meeting by its monetary policy committee is May 29.
Instead, the BoT has proposed four macroprudential measures to the Thai finance minister, according to press reports, including limiting foreign investors ability to buy some Thai bonds, imposing a fee of foreigners profiting from investing in bonds and compelling foreign investors to hedge their exchange rate risk.
Other ways to deter high capital inflows without raising policy rates and dampening economic activity includes Turkey’s decision this week to raise the reserve requirement for foreign currency deposits.
The Philippines has also been experimenting with a similar move in recent months, cutting the rate on the central bank’s Special Deposit Account (SDA) facility to make it less attractive for foreign funds to park their money there.
Through the first 20 weeks of this year, 25 percent (or 48) of the 195 policy decisions by the 90 central banks followed by Central Bank News have lead to rate cuts, another weekly increase from 24 percent after 19 weeks and 20 percent after the first 18 weeks.
This week’s total rate cuts of 125 basis points boosted the cumulative decline in global policy rates to 2,251 basis points so far this year, pushing the average Global Monetary Policy Rate (GMPR) down to 5.64 percent from 5.66 percent last week and 6.2 percent at the end of 2012.
Most central banks still keep their rates on hold from week-to-week, but it is clear that there has been an acceleration in rate cuts in recent weeks. By the end of this week, 71 of all policy decisions have favoured keeping rates on hold, down from 72 percent last week and 75 percent after the first 16 weeks of this year.
LAST WEEK’S (WEEK 20) MONETARY POLICY DECISIONS:
| COUNTRY | MSCI | NEW RATE | OLD RATE | 1 YEAR AGO |
| ISRAEL | DM | 1.50% | 1.75% | 2.50% |
| SERBIA | FM | 11.25% | 11.75% | 9.50% |
| INDONESIA | EM | 5.75% | 5.75% | 5.75% |
| ICELAND | 6.00% | 6.00% | 5.50% | |
| RUSSIA | EM | 8.25% | 8.25% | 8.00% |
| LATVIA | 2.50% | 2.50% | 3.50% | |
| TURKEY | EM | 4.50% | 5.00% | 5.75% |
| CHILE | EM | 5.00% | 5.00% | 5.00% |
NEXT WEEK (week 21) features five scheduled central bank policy meetings, including Nigeria, Ghana, Japan, South Africa and Trinidad and Tobago.
| COUNTRY | MSCI | DATE | RATE | 1 YEAR AGO |
| NIGERIA | FM | 21-May | 12.00% | 12.00% |
| GHANA | 22-May | 15.00% | 14.50% | |
| JAPAN | DM | 23-May | 0% | 0.10% |
| SOUTH AFRICA | EM | 23-May | 5.00% | 5.50% |
| TRINIDAD & TOBAGO | 24-May | 2.75% | 3.00% |
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