The response of the Fed and the BOE to the 2007-2009 global financial crises largely followed the same playbook. A series of rate cuts together with a variety of ad-hoc measure to recapitalize the banking systems culminated in large-scale asset purchases in the same month of March 2009.
The Fed kicked off its cycle of rate cuts in September 2007 and reached the current low of 0.25 percent in December 2008 while the BOE first embarked on its rate cuts in December 2007 before reaching a low of 0.50 percent in March 2009.
Asset purchases, commonly known as quantitative easing, by the BOE has boosted its balance sheet to about 25 percent of the United Kingdom’s annual Gross Domestic Product, slightly above the Fed’s balance sheet which is now the approximate equivalent of 23 percent of U.S. GDP.
Both the Fed and the BOE are therefore facing the unprecedented challenge of raising short-term rates – currently expected in 2015 - while they still have very large balance sheets.
Another common feature of the Fed’s meeting on April 29-30 and the BOE’s meeting on May 7-8 was that central bankers were meeting for the first time under new policy guidance.
Unemployment rates in both the U.S. and U.K. has declined faster than expected so in February the BOE revised its policy guidance, followed by the Fed in March. In both cases, the new guidance was qualitative in contrast to earlier guidance that linked policy to a certain unemployment rate.
Both sets of minutes reveal how cautious central bankers on both sides of the Atlantic are in the face of uncertainty, whether this is the Fed’s current concern over how to control short-term rates or the BOE’s lack of certainty over the economy’s margin of spare capacity.
The synchronicity of the Fed and BOE in preparing the groundwork for tighter policy is in stark contrast to the European Central Bank (ECB), which is widely expected to deploy a series of easing measures next month to tackle “lowflation” – a concept that describes inflation that is persistently below target and threatens to turn into deflation under an external shock.
Other highlights of global monetary policy last week was the surprise interest rate cut by Turkey’s central bank and the acute policy dilemma facing South Africa’s central bank – two of the emerging markets that were swept up in volatility in May 2013 and January 2014 as global investors retreated from emerging markets.
The Central Bank of the Republic of Turkey (CBRT) kept up its recent record of surprising financial markets, trimming its benchmark one-week repo rate by 50 basis points to 9.50 percent.
The CBRT had raised rates by a sharp 550 basis points on Jan. 28 after the lira currency and Turkish markets tumbled as a government corruption scandal gave investors another reason to withdraw funds.
The January rate hike clearly pushed Turkish rates to an unsustainable level, but a rise in April inflation to almost twice the central bank’s target had convinced markets that the central bank would wait at least a month or two before cutting rates.
Whether CBRT’s rate cut was in response to political pressure or not, is unclear.
Some commentators clearly believed that Prime Minister Recep Tayyip Erdogan was behind the decision – the Wall Street Journal said the ”central bank caved to mounting political pressure” – while others, such as Reuters, were less certain, saying the cut merely revived questions about political pressure.
The central bank argued that its “measured” rate cut reflected a “recent decline in uncertainties and an improvement in the risk premium indicators” that had pushed down market interest rates.
Financial markets, the ultimate arbiter, clearly didn’t believe the rate cut undermined the central bank’s credibility with Turkish bond yields falling and the lira strengthening.
Gill Marcus, governor of the South African Reserve Bank (SARB), again laid bare the tortuous policy decisions sometimes facing central banks.
South Africa’s economy has been battered by a series of labour disputes in recent years and the most recent strikes in the country’s platinum mines is not only undermining wages and consumption, but also exports and thus hopes of reducing the current account deficit.
A sizable downward revision in the 2014 growth forecast would normally have provided Marcus with plenty of reasons to cut rates and stimulate growth.
But a 25 percent fall in the exchange rate of the South African rand from the start of 2013 through January this year pushed up import prices and thus inflation.
In January SARB raised its benchmark rate by 50 basis points to 5.50 percent and an appreciation of the rand since February along with a return of capital inflows to emerging markets has eased some of the upward pressure on inflation.
Nevertheless, inflation in April of 6.1 percent exceeded SARB’s 3.0 to 6.0 percent target range and it is expected to remain above the bank's upper limit until the second quarter of 2015, with risks still skewed to the upside.
Marcus is under no illusion that the recent rise in the rand reflects a sudden return of investors’ confidence in South Africa, but views it as a temporary respite.
She fears that any change in global sentiment, including the view of U.S. monetary policy, could lead to a fresh bout of capital outflow, a drop in the rand and heightened inflationary pressures.
"Inflation is currently at uncomfortable levels and a marked deterioration in the outlook may require action that we will not hesitate to take," said Marcus, who still considers the SARB to be in a rising interest rate cycle.
Through the first 21 weeks of this year, central banks have cut their policy rates 20 times, or 10.1 percent of this year’s 197 monetary policy decisions taken by the 90 central banks followed by Central Bank News. This is up from 9.6 percent at the end of April but down from 11.9 percent end-March.
But policy rates have also been raised 18 times, or 9.1 percent, so far this year, a sign that that this year’s trend toward higher rates is still intact though it has weakened in recent weeks as it becomes clear that many central banks are first looking to tighten in 2015.
LIST OF LAST
WEEK’S CENTRAL BANK DECISIONS:
- Sri Lanka holds rate, wants banks to pass on lower rates
- Nigeria holds rate, concerned over upward price trend
- Tajik central bank hikes key rate to cool prices
- BOJ maintains stance, says QQE has "intended effects"
- Iceland holds rate, raises growth, cuts inflation forecasts
- Turkey cuts repo rate 50 bps but to keep tight stance
- South Africa holds rate, but remains in tightening mode
TABLE WITH
LAST WEEK’S MONETARY POLICY DECISIONS:
| COUNTRY | MSCI | NEW RATE | OLD RATE | 1 YEAR AGO |
| SRI LANKA | FM | 6.50% | 6.50% | 7.00% |
| NIGERIA | FM | 12.00% | 12.00% | 12.00% |
| TAJIKISTAN | 5.90% | 4.80% | 6.50% | |
| ICELAND | 6.00% | 6.00% | 6.00% | |
| JAPAN | DM | N/A | N/A | N/A |
| TURKEY | EM | 9.50% | 10.00% | 4.50% |
| SOUTH AFRICA | EM | 5.50% | 5.50% | 5.00% |
This week (Week
22) eight central banks will decide on monetary policy, including Israel,
Angola, Hungary, Brazil, Albania, Fiji, Egypt and Trinidad & Tobago.
TABLE WITH
THIS WEEK’S MONETARY POLICY DECISIONS:
| COUNTRY | MSCI | DATE | CURRENT RATE | 1 YEAR AGO |
| ISRAEL | DM | 26-May | 0.75% | 1.25% |
| ANGOLA | 26-May | 9.25% | 10.00% | |
| HUNGARY | EM | 27-May | 2.50% | 4.50% |
| BRAZIL | EM | 28-May | 11.00% | 8.00% |
| ALBANIA | 28-May | 2.75% | 3.75% | |
| FIJI | 29-May | 0.50% | 0.50% | |
| EGYPT | EM | 29-May | 8.25% | 9.75% |
| TRINIDAD & TOBAGO | 29-May | 2.75% | 2.75% |
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