Monetary policy: Week in review (Jan, 2012)

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

The past week in monetary policy saw interest rate decisions announced by 8 central banks, with 4 of those announcing interest rate cuts, reflecting the ongoing European sovereign debt crisis and slowing global growth.  Those announcing interest rate cuts were Brazil -50bps to 10.50%, Georgia -25bps to 6.50%, Philippines -25bps to 4.25%, and Serbia -25bps to 9.50%.  Meanwhile those that held rates unchanged were Canada 1.00%, South Africa 5.50%, Mexico 4.50%, and Latvia 3.50% (Latvia did however reduce its required reserve ratios 100bps).  Also making headlines was a widening of the interest rate corridor, an effective easing, in Indonesia.

Following are some of the key quotes and comments from the monetary policy statements and media releases issued by the central banks announcing rate decisions:

  • Brazil (cut rate 50bps to 10.50%):  “The Monetary Policy Committee believes that the timely mitigate the effects coming from a more restrictive global environment, a moderate adjustment in the level of the base rate is consistent with the scenario of convergence of inflation to the target in 2012.”
  • Philippines (cut rate 25bps to 4.25%):  “the inflation outlook remains comfortably within the target range, with expectations well-anchored. Latest baseline forecasts indicate that average annual inflation rates are likely to fall within the lower half of the 3-5 percent target range up to 2013. Pressures on global commodity prices are seen to continue to abate amid weaker global growth prospects. However, the impact of strong capital inflows on domestic liquidity and the effect of geopolitical tensions in the MENA region on global oil supplies will continue to pose upside risks to inflation.
  • Bank of Canada (held rate at 1.00%): “While the economy had more momentum than anticipated in the second half of 2011, the pace of growth going forward is expected to be more modest than previously envisaged, largely due to the external environment. Prolonged uncertainty about the global economic and financial environment is likely to dampen the rate of growth of business investment, albeit to a still-solid pace.  Net exports are expected to contribute little to growth, reflecting moderate foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.  In contrast, very favourable financing conditions are expected to buttress consumer spending and housing activity. Household expenditures are expected to remain high relative to GDP and the ratio of household debt to income is projected to rise further.”
  • South African Reserve Bank (held rate at 5.50%): “The MPC remains of the view that inflation pressures are primarily of a cost-push nature, but is concerned that a persistent upward trend in inflation and prolonged breach of the inflation target could have an adverse effect on inflation expectations which could reinforce the upward inflation dynamics. However, the MPC is also cognisant of the slowing domestic economy and feels that given the lack of demand pressures, monetary tightening at this stage would not be appropriate. At the same time, the nominal policy rate is at a long term low and the real policy rate is slightly negative, indicating a monetary policy stance that is accommodative and supportive of the real economy.”

Looking at the central bank calendar, the week ahead has 8 central banks scheduled to review monetary policy settings.  The one on many people’s minds will be the US FOMC, which is unlikely to announce anything but people will be watching for clues of any further quantitative easing measures.  The key emerging market economy, India, will also be closely watched, but with inflation still high is unlikely to move just yet.  Other than that, the broad geography of banks on the calendar next week will provide a timely insight into the status of the global economy.

  • ILS – Israel (Bank of Israel) expected to hold at 2.75% on the 23rd of Jan
  • JPY – Japan (Bank of Japan) expected to hold at 0.10% on the 24th of Jan
  • INR – India (Reserve Bank of India) expected to hold at 8.50% on the 24th of Jan
  • HUF – Hungary (Magyar Nemzeti Bank) expected to hold at 7.00% on the 24th of Jan
  • TRY – Turkey (Central Bank of Turkey) expected to hold at 5.75% on the 24th of Jan
  • USD – USA (Federal Reserve) expected to hold at 0.25% on the 25th of Jan
  • THB – Thailand (Bank of Thailand) expected to hold at 3.25% on the 25th of Jan
  • NZD – New Zealand (Reserve Bank of New Zealand) expected to hold at 2.50% on the 26th of Jan

Source: Central Bank News, January 21, 2012.

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