But the threat of inflation is never far from the surface with five central banks (Brazil, Indonesia, Gambia, Ghana and Zambia) raising rates by 350 basis points in May and 450 points in June, a sharp jump from average monthly rate hikes of just over 40 points in the first four months of the year - a likely harbinger of a rise in global monetary policy rates in the second half of this year.
Despite the aggressive pace of rate cuts – 15 in June and 16 in May, up from an monthly average of eight cuts from January through April – the net reduction in policy rates was tempered by the fact that the average rate cut was 56 basis points in those two months compared with an average rate rise of 114.
Central banks tend to raise their rates in bigger increments than when they cut rates, just as inflation tends to rise steeply at first – typically in response to some external shock - and then gradually subsides as interest rates are raised.
The end result of the 38 rate changes in May and June was that the average Global Monetary Policy Rate (GMPR) remained steady at 5.65 percent in end-June and end-May, down from 5.77 in April, 5.85 percent in January and an average 6.2 percent in 2012 among the 90 central banks covered by Central Bank News.
While central banks’ response to slower growth was the main reason for lower rates, the dominant theme in May was clearly financial markets’ and central banks’ reaction to the Bank of Japan’s launch of a new round of quantitative easing in April.
The accelerated decline in the yen not only made Japanese exporters more competitive against other Asian exporters, but there were also fears that the BOJ’s easy money would lead to capital inflows into higher-yielding currencies, posing a risk of unsustainable asset bubbles.
Four of the 16 rate cuts in May - Australia, South Korea, Thailand and Israel’s two cuts – were explicitly linked to worries over the dampening impact on growth from strong exchange rates.
The 16 rate cuts in May totaled 809 basis points while three rate rises amounted to rate rises of 350 basis points for a net reduction of 459 basis points.
But without much official warning, the U.S. Federal Reserve in late May and June announced a possible wind-down of its quantitative easing later this year, triggering a sharp reversal of capital flows.
Practically overnight, central banks’ concern over strong currencies and asset bubbles turned into a worry over the dampening effect of higher interest rates on growth and a boost to inflation from higher import prices triggered by a fall in currencies.
But the statements by Federal Reserve Chairman Ben Bernanke on May 22 merely accelerated a shift that quietly had begun a few months earlier.
A massive selloff in commodities in mid-April was the first sign that major investors and hedge funds were positioning themselves for slower growth in emerging markets. The steady improvement in U.S. labour markets – the jobless rate fell to its lowest rate in April since December 2008 – seems to have convinced investors that the tide was turning and the U.S. economy was finally on the mend.
Figures this week showed that private investors – considered to be hedge funds - sold $39.2 billion of U.S. Treasuries in May, probably taking profits ahead of the sharp price fall in May and June. Emerging market currencies also started their descent in early May as capital suddenly started flowing out, according to IIF and EPFR data.
So far, only Indonesia has responded to the pressure on its rupiah, and the accompanying rise in inflation, from the outflow of capital with a rate hike.
However, given the worldwide impact of changes in U.S. monetary policy on the entire spectrum of financial assets, it is probably only a question of time before other central banks in emerging markets will follow suit.
Even without the fall in the rupiah from the earlier-than-expected move by the Federal Reserve, the Bank of Indonesia would probably have raised rates in response to higher fuel prices and inflationary pressures from the government’s long-awaited removal of subsidies.
The 15 rate cuts in June totaled 926 basis points while the three rate rises totaled 450 points for a net reduction of 476 points.
GLOBAL MONETARY POLICY RATES (GMPR)
(Changes in May, June and year-to-date, in basis points)
| COUNTRY | MSCI | MAY | JUNE | YTD |
| RATE CUTS: | ||||
| BELARUS | -200 | -150 | -650 | |
| SIERRA LEONE | 0 | -200 | -500 | |
| MONGOLIA | 0 | -100 | -275 | |
| KENYA | FM | -100 | 0 | -250 |
| VIETNAM | FM | -100 | 0 | -200 |
| HUNGARY | EM | -25 | -25 | -150 |
| POLAND | EM | -25 | -25 | -150 |
| GEORGIA | -25 | -25 | -125 | |
| BOTSWANA | 0 | -50 | -100 | |
| COLOMBIA | EM | 0 | 0 | -100 |
| MOLDOVA | 0 | 0 | -100 | |
| TURKEY | EM | -50 | 0 | -100 |
| UGANDA | 0 | -100 | -100 | |
| INDIA | EM | -25 | 0 | -75 |
| ISRAEL | DM | -50 | 0 | -50 |
| JAMAICA | 0 | 0 | -50 | |
| MEXICO | EM | 0 | 0 | -50 |
| MOZAMBIQUE | 0 | -50 | -50 | |
| PAKISTAN | FM | 0 | -50 | -50 |
| RWANDA | 0 | -50 | -50 | |
| SRI LANKA | FM | -50 | 0 | -50 |
| UKRAINE | FM | 0 | -50 | -50 |
| ALBANIA | 0 | 0 | -25 | |
| ANGOLA | 0 | 0 | -25 | |
| AUSTRALIA | DM | -25 | 0 | -25 |
| AZERBAIJAN | 0 | 0 | -25 | |
| EURO AREA | DM | -25 | 0 | -25 |
| MACEDONIA | 0 | 0 | -25 | |
| MAURITIUS | FM | 0 | -25 | -25 |
| SOUTH KOREA | EM | -25 | 0 | -25 |
| THAILAND | EM | -25 | 0 | -25 |
| WEST AFRICAN STATES | 0 | 0 | -25 | |
| SERBIA | FM | -50 | -25 | -25 |
| DENMARK | DM | -10 | 0 | 0 |
| BULGARIA | FM | 1 | -1 | -2 |
| SUM: | -809 | -926 | -3552 | |
| RATE INCREASES: | ||||
| INDONESIA | EM | 0 | 25 | 25 |
| TUNISIA | FM | 0 | 0 | 25 |
| ZAMBIA | 0 | 25 | 25 | |
| EGYPT | EM | 0 | 0 | 50 |
| BRAZIL | EM | 50 | 0 | 75 |
| GHANA | 100 | 0 | 100 | |
| GAMBIA | 200 | 400 | 600 | |
| SUM: | 350 | 450 | 900 | |
| NET CHANGE: | -459 | -476 | -2652 |
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