Monetary Policy Week in Review – Mar 2, 2013: Rates still declining but most central banks in wait-and-see mode

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Last week seven central banks took monetary policy decisions with two banks (Hungary and Jamaica) cutting rates and the remaining five banks (Angola, Israel, Trinidad & Tobago, the Dominican Republic and Zambia) keeping rates on hold.

The main message from last week’s policy statements was that the global economy continues to slowly improve, risk appetite in financial markets is strengthening and inflationary pressures are contained by weak demand.

But is the global economy strong enough for central banks to shift from an accommodative stance toward a more neutral stance without killing the recovery?

The Bank of Israel illustrates the wait-and-see approach that currently characterizes global monetary policy.  Last year’s threat of financial meltdown from Europe’s debt crises has been averted by a combination of monetary easing and astute policy guidance. The main issue for many central banks this year is how to nudge interest rates higher without undermining economic confidence.

The Israeli central bank, which last year cut its rate by 100 basis points as the economy slowed, noted that recent economic indicators were mixed. While an improvement in activity was possible in January, fourth quarter growth was below previous quarters.
“It is therefore too early to assess whether this represents a turnaround in economic activity,” the BOI said.

Through the first nine weeks of the year, 76 percent of the policy decisions taken by the 90 banks followed by Central Bank News have favored unchanged rates, own from last week’s 77 percent.

But 20 percent of decisions have lead to rate cuts, slightly up from the 19 percent seen after the first eight weeks, showing that the trend in global monetary policy is still toward more easing.

Emerging market central banks remain the most active rate cutters, with 26 percent of their deliberations so far this year leading to rate cuts compared with 22 percent of central banks in frontier markets.

No central bank in developed markets has cut rates this year but that is largely because some of the major ones, such as the Federal Reserve, the Bank of Japan and the Bank of England, years ago slashed their rates to effectively zero and then started using their balance sheets to guide rates.

And though much attention is focused on how the Bank of Japan and the European Central Bank can further stimulate their economies, the Bank of Israel and the Federal Reserve illustrate that the global trend is starting to shift toward a more neutral stance.

While Federal Reserve Chairman Ben Bernanke last week assured financial markets of his commitment to easy policy, his testimony and the minutes from the previous week were a stark reminder that the days of quantitative easing are likely numbered.

Another topic in monetary policy last week was the nomination of new central bank governors in Japan and Hungary, with both decisions triggering a heated debate over central banks’ independence along with expectations that the new governors will pursue aggressive pro-growth policies.

In Tokyo Prime Minister Shinzo Abe nominated Haruhiko Kuroda as successor to BOJ Governor Masaaki Shirakawa and in Budapest Prime Minister Viktor Orban picked Gyorgy Matolcsy to replace Andras Simor.

LAST WEEK’S (WEEK 9) MONETARY POLICY DECISIONS

COUNTRY MSCI     NEW RATE           OLD RATE        1 YEAR AGO
ANGOLA 10.00% 10.00% 10.25%
ISRAEL DM 1.75% 1.75% 2.50%
HUNGARY EM 5.25% 5.50% 7.00%
JAMAICA 5.75% 6.25% 6.25%
TRINIDAD & TOBAGO 2.75% 2.75% 3.00%
DOMINICAN REPUBLIC 5.00% 5.00% 6.75%
ZAMBIA 9.25% 9.25%                  N/A *
Note: The Bank of Zambia introduced a policy rate in April 2012, replacing money supply targeting.
NEXT WEEK (week 10) features 13 scheduled central bank meetings, including Mauritius, Australia, Uganda, Poland, Brazil, Canada, Japan, Indonesia, Malaysia, the European Central Bank, the Bank of England, Peru and Mexico.
COUNTRY MSCI          MEETING               RATE        1 YEAR AGO
MAURITIUS 4-Mar 4.90% 4.90%
AUSTRALIA DM 5-Mar 3.00% 4.25%
UGANDA 5-Mar 12.00% 21.00%
POLAND EM 6-Mar 4.00% 4.50%
BRAZIL EM 6-Mar 7.25% 9.75%
CANADA DM 6-Mar 1.00% 1.00%
JAPAN DM 7-Mar 0.10% 0.10%
INDONESIA EM 7-Mar 5.75% 5.75%
MALAYSIA EM 7-Mar 3.00% 3.00%
EURO AREA DM 7-Mar 0.75% 1.00%
UNITED KINGDOM DM 7-Mar 0.50% 0.50%
PERU EM 7-Mar 4.25% 4.25%
MEXICO EM 8-Mar 4.50% 4.50%

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