Global interest rate movements: 2011 half-year review

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The review below comes courtesy of Central Bank News, an authoritative source on monetary policy developments.

This article reviews the monetary policy interest rate activity of the world’s central banks during the first half of 2011. The key takeaway is that monetary policy tightening has been the dominant game for most emerging market central banks in the first half of the year, however the majority of central banks are still in the no-change camp. Indeed of the 79 central banks that Central Bank News monitors, 33 made net increases to their interest rates, while 40 held their rates net unchanged, and only 6 made net reductions to their policy interest rates.

Click here or on the image below for a larger table.

Of the central banks that net increased their interest rates, the average increase was 111 basis points, but with many opting for 25 (8), or 50 (7) basis points. Meanwhile the outliers were Vietnam (600bps) and Belarus (550bps); the former dealing with hyperinflation, and the latter dealing with a number of economic worries. And it wasn’t only emerging markets that were net tighteners in the first half; Denmark, Norway, the EU, and Sweden were among those to tighten monetary policy settings.

Click here or on the image below for a larger graph.

As for those that loosened interest rates, it was much a case of being the outlier. New Zealand dropped its official cash rate earlier this year after an earthquake hit one of its cities. Meanwhile Iceland dropped rates in response to low inflation and continued economic challenges. Qatar dropped its policy rate to help the non-energy part of its economy, and Ghana dropped rates due to easing in domestic inflation pressures.

So overall the first half of the year in monetary policy interest rates was characterised by inaction for most, tightening by many, with a few outliers reducing interest rates. Much of the policy tightening went on in emerging markets where inflation has been pushed above inflation targets due to rising global commodity prices and strong economic growth and activity levels (i.e. both demand pull and cost push).

Going into the second half of the year the outlook is less certain, which in part explains inaction being the main stance for most of the monetary policy setters. On commodities, there has been a recent correction in broad commodity prices, and many commodities finished the past quarter with price falls. A stable or falling global commodity price environment could see less tightening, and perhaps pockets of loosening.

Meanwhile the global economic growth outlook continues to be uncertain, with some economies e.g. the US making slow progress, and tail risks e.g. Greek sovereign debt default, having the potential to pull back the aggregate demand impulse. So out next review could well see more banks opting for no change or even net policy loosening. In any case, keep checking the website for monetary policy updates.

Source: Central Bank News, July 1, 2011.

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