Month: April 2013
Last week nine central banks took policy decisions, with Hungary continuing its rate-cutting spree and the other eight banks (Namibia, New Zealand, Philippines, Fiji, Japan, Mexico, Colombia and Trinidad & Tobago) keeping rates unchanged as pressure mounted on euro zone policy makers to get serious about reforms and speed up growth.
A quiet exasperation over the lack of action by Europe’s policy makers turned into more forceful criticism during the annual meeting of the International Monetary Fund in Washington D.C. with signs that the dogged belief in austerity as a growth strategy is starting to break down.
The other theme dominating central banking last week was the continuing fallout from Japan’s aggressive policy easing, which has lead to a weaker yen and upward pressure on other currencies as some of the Bank of Japan’s money looks for higher yield outside the country.
The Bank of Korea’s governor expressed his concern over the impact of the weaker yen on the competitiveness of his country’s industry; the Bank of Thailand is considering how to reduce the upward pressure on the bath; the Reserve Bank of New Zealand said upward pressure on the overvalued kiwi dollar was growing and the Bank of Israel said money was flowing into its bonds.
Last year’s warning by Mervyn King, the outgoing governor of the Bank of England, that 2013 could feature “actively managed exchange rates as an alternative to the use of domestic monetary policy” was prescient and slightly ominous.
Through the first 17 weeks of this year, the overwhelming majority of the world’s central banks have kept their rates on hold: 78 percent of the 156 policy decisions taken so far by the 90 central banks followed by Central Bank News have lead to unchanged rates, slightly up from 77 percent after 16 weeks.
Globally, 19 percent of policy decisions this year have lead to rate cuts – largely by central banks in emerging economies – unchanged from last week.
Rate rises are still rare – there have only been six so far this year – but this number is likely to rise in the second half of the year as global growth slowly strengthens and inflationary pressures rise, especially in Southeast Asia.
The only real sinkhole in global growth remains Europe and policy makers from around the world appear to be losing their patience with the euro zone’s lack of progress in solving its problems.
Through the barrage of statements and communiqués from the IMF and G20 meetings, it is clear that global policy makers have decided that Europe’s experiment with harsh austerity has gone far enough. Recession, popular dissatisfaction and growing unemployment bear witness to the strategy’s failure.
There was a remarkable confluence of criticism of austerity last week: The validity of the academic work used to underpin pro-austerity policies was questioned; the IMF stressed that fiscal tightening should only occur at a pace that economic recovery can handle – underlining the shift away from its traditional position as an advocate of austerity – while African finance ministers insisted euro zone politicians “work harder and faster” so growth in their own economies isn’t undermined.
The bottom line is that the fragile global economic recovery may falter without growth in Europe and this year it’s economy is set to contract for the second year in a row.
And the criticism, all too often shouted through the streets of Athens, Madrid, Rome and Lisbon, is finally being heard by a growing number of top policy makers.
Christine Lagarde, IMF managing director, talked of “adjustment fatigue” and growing tensions over the fairness of public policy, while European Commission President Jose Manuel Barroso said the combination of lower spending and higher taxes may have hit the limits of public acceptance and was now contributing to the recession.
But so far the austerity camp seems unbowed and one its leading proponents, German Chancellor Angela Merkel, even had the audacity to up the ante, saying the European Central Bank would have to raise interest rates if its policy was based purely on German conditions.
Although Germany is doing better than many of its euro zone brethren, it’s economy is hardly in need of cooling. The German economy shrank by 0.6 percent in the fourth quarter of 2012 from the third quarter and is forecast to grow a mere 0.5 percent in 2013, it’s inflation rate fell to 1.4 percent in March, below the ECB’s target, and the unemployment rate is 5.4 percent.
|COUNTRY||MSCI||NEW RATE||OLD RATE||1 YEAR AGO|
|TRINIDAD & TOBAGO||2.75%||2.75%||3.00%|
|COUNTRY||MSCI||DATE||RATE||1 YEAR AGO|
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US #Nasdaq Composite Index (COMP) fell 10.72 points or 0.3% on Friday to close at 3,279.26 gaining 2.3% For the week
US benchmark Standard & Poor’s #S&P500 Index fell 2.92 points or 0.2% to close at 1,582.24 and for the week the index rose 1.7%
All #US #StockMarket #Indices ended the week with gains
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The Central Bank of Trinidad and Tobago held its benchmark repo rate steady at 2.75 percent, saying the current accomodative policy stance was appropriate as the recovery of the economy is likely to be subdued with inflationary pressures contained.
The central bank, which cut rates by 25 basis points in 2012, said headline inflation rose to an annual rate of 6.9 percent in March from 5.9 percent in February but on a monthly basis the headline inflation rate for the two consecutive months slowed to 0.2 percent from 0.3 percent in February.
Core inflation, which excludes food, inched up to 2.2 percent in March from February’s 2.1 percent while growth in private sector credit remained relatively slow in February, with credit to the private sector up by 2.1 percent from 1.9 percent in the previous month.
“While economic activity is expected to pick up gradually over the course of 2013, the recovery is likely to be subdued,” the bank said, adding that “continued stability in core inflation suggests that underlying inflationary pressures remain well contained.”
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Colombia’s central bank held its benchmark interest rate steady at 3.25 percent, as expected, saying the economy continues to grow below its potential and inflation is below 3.0 percent but it is “particularly difficult to interpret current trends in economic activity and its projection.”
But recent rate cuts and proposed fiscal policy measures should help raise economic growth toward the country’s productive capacity and this will help inflation move closer to the central bank’s target.
“In this context, the balance of risk assessment indicates the need to maintain the policy interest rate at 3.25%, while waiting for more information,” the central bank said.
The Central Bank of Colombia central bank has cut rates seven times by a total of 200 basis points since July last year, most recently by 50 basis points in March.
Economic activity in the first quarter of this year has slowed from 2012, the central bank said, with household consumption growing at a slower rate along with a deterioration in industry.
But the recent behaviour of some components of aggregate spending and fewer working days in the first quarter compared with last year has made it difficult to interpret current trends, the bank said.
“However, economic growth is expected to increase throughout the year in reaction prior monetary policy actions and programs recently announced by the national government,” the bank said.
The central bank’s staff forecasts that Colombia’s Gross Domestic Product should expand by 3-5 percent this year, with 4.3 percent the most likely figure, up from 2012’s 4.0 percent last year. In 2011 Colombia’s economy grew by 6.6 percent.
Colombia’s government has proposed a wide-ranging 5 trillion peso stimulus plan to revive industry and agriculture, boost housing, reduce energy costs and measures to cut company costs.
Colombia’s inflation rate accelerated slightly to 1.91 percent in March from a 60-year low of 1.83 percent in February, but still well below the central bank’s target range of 2-4 percent.
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Mexico’s central bank held its benchmark target for its overnight rate steady at 4.0 percent, saying the recent rise in inflation was temporary and there are no widespread pressures so inflation should resume its downward trend in June and then gradually move toward’s the bank’s 3.0 percent target.
The Bank of Mexico, which last month cut its rate for the first time since July 2009 but stressed it was not embarking on a new cycle of easing, said inflation was expected to remain high in April and May and then settle around 3-4 percent during the second half of the year before declining to around 3 percent in 2014.
A rise in Mexico’s inflation rate to 4.72 percent in the first half of April from 4.25 percent in March and 3.55 percent in February strengthened expectations that the bank would not cut rates further in an attempt to dampen the rise in the peso and temper the inflow of capital.
Mexico’s core inflation rate is expected to remain close, and even below, the bank’s 3.0 percent target for most of 2013 and 2014, the central bank said, adding that it would keep a close eye on prices to ensure that there are no second-round effects of the rise in inflation.
Mexico’s economy continues to show signs of weakness, further reducing inflationary pressure, and downside risks to economic activity prevail from the possibility that recent slowdown in the U.S. economy could intensify, the bank said.
“On balance, significant downside risks to global economic growth prevail,” the central bank said, adding that Japan’s growth prospects had improved from its “unprecedented monetary and fiscal stimulus” but there are doubts of the effectiveness of its strategy in the medium term given the uncertain transmission channel through which the Bank of Japan is operating.
With weak global activity and declining international raw materials prices, the inflationary outlook remains favourable in most countries and monetary policy is expected to remain accommodative in advanced and emerging economies and “in some cases additional relaxations could occur,” it said.
Mexico’s peso has risen by more than six percent against the U.S. dollar this year and its exports declined by 2.9 percent in February when the economy only expanded by 0.2 percent from January for annual growth of 0.4 percent, according to the national statistics office’s IGAE index, which captures most of the components of Gross Domestic Product.
The low growth in February was caused by a 1.2 percent drop in industrial output while agriculture and services registered higher growth.
In the fourth quarter of 2012, Mexico’s GDP rose by 0.8 percent from the third quarter for annual growth of 3.2 percent, the same rate as in the third quarter.
Mexico’s economy is forecast to grow by around 3.5 percent this year, down from 2012’s estimated 3.9 percent.
Last month the central bank said inflation was expected to rise to around 4 percent in coming months before settling down to a rate of about 3.0 percent in the second half and in 2014.
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The Philippine central bank kept its main policy rates steady but again cut the interest rate on its Special Deposit Account (SDA) facility by 50 basis points to 2.0 percent for all maturities, moves that were expected, and said it would “deploy macroprudential measures as needed to pre-emptively address any potential misalignment in asset prices.”
The Central Bank of the Philippines (BSP) said its decision to maintain the benchmark overnight borrowing rate at 3.50 percent and the overnight lending rate at 5.50 percent was based on its assessment that inflation is “likely to remain manageable over the bank’s policy horizon” and in the lower half of its target range for 4.0 percent, plus/minus one percentage point.
The central bank has been using the SDA facility, which has now been cut by 150 basis points this year, to make it less attractive for foreign funds to park their money in the Philippines which tends to put upward pressure on the peso and fuel local asset prices.
But by keeping the overnight borrowing and lending rates steady, the central bank is trying to ensure that there is enough liquidity to stimulate economic activity. The bank also maintained its reserve requirement ratios.
The reductions in the SDA rate is part of the central bank’s shift toward a corridor system for its interest rates, a system that has been used by other central banks, such as Turkey, to handle the “wall of liquidity” that is attracted to fast-growing economies from investors in many advanced economies where interest rates have been ultra-low since the global financial crises.
Last year the Philippine peso appreciated by 6.8 percent against the U.S. dollar but since March the peso has been easing and portfolio investment data show a net outflow, which economists attribute to the central bank’s move to cut the SDA rate.
Inflation in the Philippines eased to 3.2 percent in March, down from 3.4 percent, and last month the central bank raised its forecasts for full-year inflation to 3.3 percent from 3.0 percent.
The risks to the central bank’s inflation outlook are evenly balanced with downside risks from the strength of the global economy and the “relative firmness of the peso” while the upside risks stem from power rate adjustments and the “possibility of a sustained surge in liquidity owing to strong capital inflows,” the bank’s monetary board said.
The country’s Gross Domestic Product expanded by 1.5 percent in the fourth quarter from the third for annual growth of 6.8 percent, down from 7.2 percent in the third quarter.
The Philippine economy expanded by 6.6 percent in 2012 and the government forecasts growth of 6-7 percent this year. Last month the central bank’s governor said the economy was still in an expansion phase in the first quarter of this year.
Last year the BSP cut its benchmark overnight borrowing, or reverse purchase facility (RRP) rate by 100 basis points, most recently in October in light of low inflation. Since then it has kept the rate steady to allow the lower rate to work its way through the economy and stimulate activity.
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Namibia’s central bank held its benchmark repo rate steady at 5.50 percent, repeating that interest rates need to remain low to “support the economy and mitigate, as far as possible, the impact of endured slow growth in many our trading partners.”
The Bank of Namibia, which has held rates steady this year after cutting by 50 basis points last year, said the country’s economy was resilient and growth this year is forecast at 4.4 percent, down from an estimated 5.0 percent in 2012.
“Despite ongoing uncertainties in the global economy, domestic growth continues to be relatively strong, while inflationary pressures are low,” the Bank of Namibia said, adding developments were largely in line with its assessment from February.
So far this year, growth has been driven by higher output from mining, agriculture, manufacturing and construction, while wholesale and retail has contributed less.
A recent decline in international commodity prices is of a concern as this impacts the mining industry, the bank said, adding that the government budget will support domestic production and consumption through relatively high levels of expenditure and tax relief.
Namibia’s inflation rate rose to a “manageable” 6.3 percent in March from 6.21 in February, with no changes anticipated in the short to medium-term, the bank said.
Credit growth also remains robust, with credit to the business sector the main driver while credit to individuals rose less. The fiscal position of the government has improved, allowing for the build-up of a cash balances with the central bank.
Foreign reserves are still enough to cover three months of imports and the currency peg, the bank said.
At its previous meeting in February, the Bank of Namibia also forecast that the economy would grow by 4.4 percent this year and it was keeping its policy rate low to mitigate the impact of slow growth in many trading partners.
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