Monetary Policy Week in Review – Jan 13-17, 2014: Brazil raises rate as IMF warns of deflation amid buoyant mood

    Last week Brazil captured the honor of being the first central bank to raise interest rates in 2014 while Tajikistan cut its rate and six other central banks maintained their policy rates as higher global growth forecasts and a sense of optimism in the euro zone was dented by the head of the IMF who warned against the risk of deflation.
    The mood in global financial markets was upbeat, supported by the World Bank raising its 2014 growth forecast and reports the International Monetary Fund (IMF) will follow suit along with European Central Bank (ECB) board member Benoit Coeure’s confidence in the economic recovery that he said there might not be a need for another round of long-term refinancing operations (LTROs).
    More importantly, the positive tone in global financial markets is allowing the Federal Reserve’s reduction in asset purchases to proceed smoothly, though central banks worldwide remain on tenterhooks, aware that the gradual unwinding of years of extraordinary accommodative policy has the potential to disrupt capital flows and crush financial markets and currencies.
   The Bank of Mozambique, one of the six central banks that held rates steady last week, clearly expressed this sense of cautious relief over how financial markets so far are taking the Fed’s tapering of quantitative easing, saying its own policy decision was taken in “a scenario that requires caution and prudence.”
    IMF Managing Director Christine Lagarde injected a dose of harsh reality into the general upbeat mood, acknowledging that the deep-freeze in the global economy is over but world growth remains “too low, too fragile and too uneven” with some 200 million people in need of employment.
    “With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery,” she told the National Press Club in Washington D.C., adding:
    “If inflation is the genie, then deflation is the ogre that must be fought decisively.”

   Through the first three weeks of the year, 3 central banks have cut rates, or 17 percent of this year’s 18 policy decisions taken by the 90 central banks followed by Central Bank News. This is slightly down from 20 percent the previous week as Brazil last week became the first central bank to raise its rates this year, continuing last year’s tightening cycle.

LIST OF LAST WEEK’S (WEEK 3) DECISIONS:

• Kenya holds rate as inflation eases, strong confidence
• Tajikistan cuts rate 70 bps to 4.8 percent
• Mozambique holds rate steady amid caution and prudence
• Brazil raises Selic rate by 50 bps, 7th rate rise in a row
• Serbia holds rate, sees inflation back in tolerance band
• Egypt holds rate steady, sees limited inflation risks
• Chile holds rate, but may have to cut in coming months
• Pakistan holds rate steady at 10% on lower inflation

TABLE WITH LAST WEEK’S MONETARY POLICY DECISIONS:

COUNTRY	MSCI	NEW RATE	OLD RATE	1 YEAR AGO
KENYA	FM	8.50%	8.50%	9.50%
TAJIKISTAN		4.80%	5.50%	6.50%
BRAZIL	EM	10.50%	10.00%	7.25%
SERBIA	FM	9.50%	9.50%	11.50%
MOZAMBIQUE		8.25%	8.25%	9.59%
CHILE	EM	4.50%	4.50%	5.00%
EGYPT	EM	8.25%	8.25%	9.25%
PAKISTAN	FM	10.00%	10.00%	9.50%

This week (Week 4) five central banks will be deciding on monetary policy, including Turkey, Hungary, Japan, Canada and Thailand.

COUNTRY	MSCI	DATE	CURRENT  RATE	1 YEAR AGO
TURKEY	EM	21-Jan	4.50%	5.50%
HUNGARY	EM	21-Jan	3.00%	5.50%
JAPAN	DM	22-Jan	N/A	0.10%
CANADA	DM	22-Jan	1.00%	1.00%
THAILAND	EM	22-Jan	2.25%	2.75%

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