Last week 11 central banks took
policy decisions with six banks keeping rates steady (Angola, Albania, the
United States, the Czech Republic, Romania and Uganda), Bulgaria raising its
rate and four banks cutting rates, most notably the European Central Bank (ECB)
and the Reserve Bank of India (RBI) along with Denmark and Botswana.
Both the ECB and the RBI cut
their key rates by 25 basis points, both rate cuts were widely expected and
both central banks appealed - almost in unison - to their respective governments to get busy on reforming their economies as the problems, as ECB President Mario Draghi said,
“cannot be fixed by monetary policy.”
That sentiment was echoed by
the RBI, which said “recent monetary policy action, by itself, cannot revive
growth.”
But that is where the similarities
end.
While Draghi said the ECB is
“ready to act if needed,” including pushing the deposit rate into negative territory,
the RBI cautioned there was “little space
for further monetary easing” due to inflationary pressures.
Despite his willingness to act,
Draghi is running out of options to reverse Europe’s shrinking economy. Large
banks can draw all the money they need from the ECB at a refinancing rate of
0.50 percent while banks that rely on the interbank market for funds pay 6-7
basis points, or “almost zero, ” as Draghi said.
And a plan to funnel loans to small and
medium-sized businesses, mentioned by Draghi last month, turns out to be a very
complex undertaking that will not happen in the near term.
“The ECB cannot clean bank’s
balance sheets,” Draghi said, admitting that he was frustrated that his efforts
were not ending up with “better welfare, lower unemployment and better economic
activity” in the 17-nation euro area.
The core of the problem is that
80 percent of all loans or credits to businesses in Europe go through the
banking system but banks are getting weaker and less able to lend as the
ongoing recession increases the share on non-performing loans and toxic assets on
their books. Some banks will now have to strengthen their capital base.
“In Europe, you have to go through banks.
You don’t have capital markets of the kind you have in the United States, so
that we have to proceed via the banking system,” Draghi said, adding that 80
percent of all financial intermediation in the U.S. goes via capital markets.
So together with the European
Investment Bank (EIB), the ECB is working on ways to package and thus create a
market for such loans, known as asset-backed securities (ABSs).
But it’s far from an easy task
and the outcome is far from clear.
“We do not have a precise
position on what we will do,” Draghi admitted, “you have to consider that the
ABS market is dead and has been dead for a long time.”
Another important event in
central banking this week was the Federal Reserve’s statement that it may either increase or
decrease the amount of assets it will be purchasing, depending on the state of
the U.S. jobs market and inflation.
Like the Bank of Japan and the
Bank of England, the Federal Reserve has been engaged in purchasing various
assets, mainly government bonds, to keep long-term interest rates low as a way to
stimulate economic activity when official policy rates hit the zero bound.
While the Federal Reserve is
still sticking to its current plan of buying $85 billion worth of Treasuries
and housing-related debt a month, the issue of how and when it will start to
curtail these purchases weigh heavily on investors’ minds.
Although the Federal Reserve
has assured markets that its “exceptionally” low target for the federal funds
rate will remain in place for quite a while, any sign that it will reduce its
asset purchases seems likely to be interpreted as the start of monetary
tightening, sending shockwaves through financial markets.
Every word uttered by members
of the Federal Open Market Committee of how and when the Federal Reserve will start
to normalize monetary policy is causing jitters in markets, and the debate is
likely to dominate sentiment for months.
Signs of an improving U.S. economy
is immediately met by expectations that the Federal Reserve will wind down
asset purchases while signs of a worsening economy is seen as a reason for
expanding asset purchases.
By now officially linking its
asset purchases to inflation and the jobs market – just like the federal funds
rate - the Federal Reserve is seeking to soothe investors’ frayed nerves: Don’t
worry, monetary policy will first be tightened when the economy is strong
enough to handle it.
Central banks in emerging
markets account for 38 percent of this year’s rate cuts, but thanks to this
week’s cut by the ECB and Denmark, the ratio of rate cuts by banks in developed
markets tripled to 9 percent from 3 percent.
Central banks from other markets - such as
Botswana this week and Mongolia and Georgia in past weeks – account for 41
percent of all rate cuts this year.
But the overwhelming majority
of this year’s decisions by central banks, 76 percent, have gone in favour of
holding rates on hold following last year’s spree of rate cuts and the slow,
but gradual improvement of the global economy.
LAST WEEK’S
(WEEK 18) MONETARY POLICY DECISIONS:
| COUNTRY | MSCI | NEW RATE | OLD RATE | 1 YEAR AGO |
| ANGOLA | 10.00% | 10.00% | 10.25% | |
| BOTSWANA | 9.00% | 9.50% | 9.50% | |
| BULGARIA | FM | 0.02% | 0.01% | 0.15% |
| ALBANIA | 3.75% | 3.75% | 4.25% | |
| UNITED STATES | DM | 0.25% | 0.25% | 0.25% |
| EURO AREA | DM | 0.50% | 0.75% | 1.00% |
| CZECH REPUBLIC | EM | 0.05% | 0.05% | 0.75% |
| DENMARK | DM | 0.20% | 0.30% | 0.60% |
| ROMANIA | FM | 5.25% | 5.25% | 5.25% |
| UGANDA | 12.00% | 12.00% | 20.00% | |
| INDIA | EM | 7.25% | 7.50% | 8.00% |
Next
week (week 19) features 13 central bank policy decisions, including Australia, Sri Lanka, Norway, Malawi, Poland, Georgia, South Korea, United Kingdom, Malaysia, Peru, Egypt,
the Philippines and Mozambique. New Zealand will be issuing its financial stability report on May 8.
In addition, the U.K is hosting the spring
meeting of Group of Seven (G7) finance ministers and central bank governors on
Friday and Saturday. The G7, which has met regularly since 1976, comprises
Canada, France, Germany, Italy, Japan, the UK and the USA. Representatives of
the European Union, the ECB and heads of international financial institutions
also attend the meetings.
| COUNTRY | MSCI | DATE | RATE | 1 YEAR AGO |
| AUSTRALIA | DM | 7-May | 3.00% | 3.75% |
| SRI LANKA | FM | 7-May | 7.50% | 7.75% |
| MALAWI | 7-May | 25.00% | 16.00% | |
| NORWAY | DM | 8-May | 1.50% | 1.50% |
| POLAND | EM | 8-May | 3.25% | 4.75% |
| GEORGIA | 8-May | 4.50% | 6.00% | |
| SOUTH KOREA | EM | 9-May | 2.75% | 3.25% |
| UNITED KINGDOM | DM | 9-May | 0.50% | 0.50% |
| MALAYSIA | EM | 9-May | 3.00% | 3.00% |
| PERU | EM | 9-May | 4.25% | 4.25% |
| EGYPT | EM | 9-May | 9.75% | 9.25% |
| PHILIPPINES | EM | 10-May | 3.50% | 4.00% |
| MOZAMBIQUE | 10-May | 9.50% | 13.50% |
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