Monetary Policy Week in Review – Dec 2-6, 2013: Egypt, Uganda cut as low inflation worries ECB, Canada, Norway

    Last week the central banks of Egypt and Uganda cut key interest rates while the ECB, the Bank of Canada and Norges Bank voiced concern over low inflation as the debate over the U.S. Federal Reserve’s tapering of asset purchases rumbled on.
    The use of exchange rates as a internationally competitive tool – one of this year’s recurring themes – also surfaced last week as the Reserve Bank of Australia (RBA) again voiced its concern over the “uncomfortably high” Australian dollar and the Canadian dollar fell to three-year lows on the view that the Bank of Canada (BOC) has turned more dovish just at the same time that the Fed may decide that the U.S. economy is strong enough to handle a reduction in its $85 billion monthly bond purchases.
   Mario Draghi, president of the European Central Bank (ECB), again stressed that he was ‘‘ready and able’’ to take new steps to aid the euro area economy and forecast a “prolonged period of low inflation,” a phenomenon that raises the specter of Japan’s 20 year battle to rid the country of deflation.
    Although the BOC already dropped its policy tightening bias in November, last week’s reference to the growing downside inflation risks, the lack of stronger exports and the expected soft landing for the housing sector reinforced the impression that Canadian rates will be on hold until 2015.
    Echoing Canada’s easier policy stance, Norway's central bank pushed back any rate increase by 12 months to the summer of 2015.
   As the BOC, Norges Bank referred to lower-than-expected inflation, a decline in house prices and the possibility of low wage growth. The only positive factor for Norway's economy was a depreciation of the krone currency.
    Uganda’s central bank surprised markets by cutting its rate by 50 basis points to 11.5 percent, only two months after warning that it could raise rates if core inflation were to accelerate and a rate rise in September.
    Egypt’s central bank also surprised markets by cutting its rate by 50 basis points to 8.25 percent as inflation rose in October and may rise further in November and December. Economists had also expected the bank to maintain rates to avoid any further outflow of capital.
    But the Central Bank of Egypt said the downside risks to the economy outweighed the upside risks to inflation given the “persistently negative output gap since 2011” and challenges facing the euro area and softer growth in emerging markets.
    In addition to the ECB, the BOC, the RBA and Norges Bank, the central banks of Poland, the United Kingdom and Mexico maintained their rates last week.
 
    Through the first 49 weeks of this year, central banks have cut their policy rates 111 times, or 23.6 percent of the 473 policy decisions taken by the 90 central banks followed by Central Bank News.
    This is unchanged from the previous week, but down from 25.3 percent after the first half, reflecting the recent rate rises by some of the major emerging market central banks.
     Policy rates have been raised 26 times this year, or 5.5 percent of this year’s policy decisions, up from 4.7 percent after the first half of the year.

     LAST WEEK’S (WEEK 49) MONETARY POLICY DECISIONS:

COUNTRY	MSCI	NEW RATE	OLD RATE	1 YEAR AGO
AUSTRALIA	DM	2.50%	2.50%	3.00%
UGANDA		11.50%	12.00%	12.00%
CANADA	DM	1.00%	1.00%	1.00%
POLAND	EM	2.50%	2.50%	4.25%
NORWAY	DM	1.50%	1.50%	1.50%
UNITED KINGDOM	DM	0.50%	0.50%	0.50%
EUROSYSTEM	DM	0.25%	0.25%	0.75%
EGYPT	EM	8.25%	8.75%	9.25%
MEXICO	EM	3.50%	3.50%	4.50%

    This week (week 50) 11 central banks are scheduled to hold policy meetings, including Sri Lanka, Iceland, South Korea, New Zealand, Namibia, the Philippines, Serbia, Indonesia, Switzerland, Peru and Fiji.

COUNTRY	MSCI	DATE	CURRENT  RATE	1 YEAR AGO
SRI LANKA	FM	9-Dec	6.50%	7.50%
ICELAND		11-Dec	6.00%	6.00%
SOUTH KOREA	EM	12-Dec	2.50%	2.75%
NEW ZEALAND	DM	12-Dec	2.50%	2.50%
NAMIBIA		12-Dec	5.50%	5.50%
PHILIPPINES	EM	12-Dec	3.50%	3.50%
SERBIA	FM	12-Dec	10.00%	11.25%
INDONESIA	EM	12-Dec	7.50%	5.75%
SWITZERLAND	DM	12-Dec	0.25%	0.25%
PERU	EM	12-Dec	4.00%	4.25%
FIJI		12-Dec	0.50%	0.50%

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