Monetary Policy Week in Review – Jan. 19, 2013: Five of six central banks keep rates on hold, Mexico turns dovish

     Last week monetary policy committees from six central banks met, with five banks (Russia, Brazil, Sri Lanka, Chile and Mexico) holding rates steady and Serbia’s central bank once again raising interest rates in its long-running battle to curtail expectations and suppress inflation.

     Through the first three weeks of 2013, policy committees from 18 central banks have met, with 15 keeping rates on hold, two cutting rates and one raising rates.

    So far, eight of nine emerging market central banks have kept rates on hold, with one cutting rates, and two developed market central banks have kept rates steady.

    It is still too early to accurately gauge whether last year’s rapid pace of global rate cuts is slowing down, but it seems clear that central banks in Asia are becoming cautious as last year’s rate cuts begin to stimulate growth and China’s economic engine shifts up a gear.

    Although Thailand’s central bank did not meet last week, it issued its latest policy report, revising upward its growth forecasts. In 2012 the Bank of Thailand cut rates by 50 basis points and said the momentum in domestic demand was helping boost growth and exports should pick up in the second half of the year.

     Sri Lanka has been facing a very different challenge than the rest of the world, raising rates last year to keep credit expansion in check. But its efforts appear to be paying off, with the central bank expecting growth in 2013 to surpass that of 2012 as last year's policy tightening held back expectations and the inflation rate is now set to decline.

     The upbeat tone in Asia was in contrast to statements from Mexico and Brazil where economic growth appears to be slowing down. Brazil’s central bank said domestic economic activity was less intense than expected and Mexico’s central bank took note of a slowdown in exports - a sign that Europe’s weakness is catching up with Mexico - and parts of domestic spending

    While Banco Central do Brazil confirmed that it will hold rates steady for a longer period, following last year’s 3.75 percentage point cut in rates, Banco de Mexico switched course and turned to dove from hawk.

    After warning for months that it may have to raise rates to curtail inflation, the Mexican central bank raised the prospect of rate cuts in light of declining inflation and lower economic growth.

    Meanwhile in Chile, the central bank remains in a neutral stance with growth still strong and inflation slowing, though some economist are starting to look ahead to rate hikes later this year as growth could  push up inflation.

     Inflation in Russia and Serbia continues to be above central bank targets with the Bank of Serbia raising its rate for the seventh time since mid-2012 while the Bank of Russia held rates steady and said the risk of a significant economic slowdown from its tight policy was still considered minor.

LAST WEEK’S (WEEK 3) MONETARY POLICY DECISIONS:

COUNTRY	MSCI	NEW RATE	OLD RATE	1 YEAR AGO
RUSSIA	EM	8.25%	8.25%	8.00%
BRAZIL	EM	7.25%	7.25%	10.50%
SRI LANKA	FM	7.50%	7.50%	7.50%
SERBIA	FM	11.50%	11.25%	9.50%
CHILE	EM	5.00%	5.00%	5.00%
MEXICO	EM	4.50%	4.50%	4.50%

     NEXT WEEK (Week 4) 10 central banks are scheduled to decide on monetary policy: Japan, Turkey, Nigeria, Canada, Argentina, the Philippines, South Africa, Latvia, Angola and Trinidad & Tobago. The overriding focus will be on the Bank of Japan which is under pressure to find a way to wrest the country from the grip of deflation.  

COUNTRY	MSCI	MEETING	RATE	1 YEAR AGO
JAPAN	DM	22-Jan	0.10%	0.10%
TURKEY	EM	22-Jan	5.50%	5.75%
NIGERIA	FM	22-Jan	12.00%	12.00%
CANADA	DM	23-Jan	1.00%	1.00%
ARGENTINA	FM	23-Jan	9.00%	9.00%
PHILIPPINES	EM	24-Jan	3.50%	4.25%
SOUTH AFRICA	EM	24-Jan	5.00%	5.50%
LATVIA		24-Jan	2.50%	3.50%
ANGOLA		25-Jan	10.25%	10.25%
TRINIDAD & TOBAGO		25-Jan	2.75%	3.00%

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