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  • Monetary Policy Week In Review – Oct 6-10, 2014: Volatility Returns As Forward Guidance Is Questioned

    Volatility returned with a vengeance in financial markets last week as investors took fright of the prospect of slowing economic growth, especially in Europe, at the same time the U.S. Federal Reserve wraps up its asset purchases and gears up for its first rate rise in more than eight years.
    Just how the Federal Reserve will communicate its future policy stance once the era of quantitative easing (QE) ends was one of the main topics discussed by the Federal Open Market Committee (FOMC) at their September meeting, according to the minutes released last week.
    For almost two years, the FOMC has been applying the forward guidance that the fed funds rate would be maintained for "a considerable time" after QE ends.
    It is now faced with the challenge of replacing that phrase with words that "avoid sending unintended signals about the Committee's policy outlook," as the minutes said.
    At its meeting on Sept. 16 and 17, the FOMC confirmed that it would end its asset purchase program at its meeting Oct. 29 with the final purchases in November, if the labor market continues to improve and inflation moves toward its 2.0 percent goal.
    Whether that timetable remains intact has now been thrown into doubt by the slowdown in global growth and the rising dollar that could hold back inflation, according to several FOMC members in recent days.

    How central banks can communicate their intended policy amid a sea uncertainty was the focus of a speech last week by Bank of Canada Governor (BOC) Stephen Poloz, who noted "there may be significant volatility when markets perceive the central bank is preparing to change its position."
    Poloz describes the recent use of forward guidance as taking certain policy options off the table, a move that is tantamount to giving the market a one-way bet.
    With memories of last summer's "taper tantrum" still fresh in most investors' memories, Poloz says financial markets respond to such one-way bets with leveraged positions so its hardly a surprise that volatility returns when it looks like the guidance is being changed.
    Another potential downside of forward guidance is that it is conditional upon economic forecasts. These assumptions become caveats for the guidance so fragile markets end up needing repeated assurances in light of new data that may undermine the forecasts.
    "In short, forward guidance can become addictive for markets if it is overly precise or heavily weighted with caveats," Poloz said.
    Poloz' conclusion is that forward guidance is useful but should be reserved primarily at the zero lower bound. During more normal times, central banks should offer full transparency of the risks the are weighing in policy deliberations.
    This allows financial markets to assess new information in sync with the central bank so the market remains two-way and less vulnerable to unusual leveraging and volatile shifts in sentiment.
    "Essentially, the net effect of dropping forward guidance is to shift some of the policy uncertainty from the central bank's plate back onto the market's plate, a more desirable situation in normal times," Poloz said.

    Through the first 41 weeks of this year, the 90 central banks followed by Central Bank News have cut their policy rates 51 times, or 13.5 percent of all policy decisions, up from 12 percent at the end of the first half and 12 percent at the end of the first quarter.
    Central banks in advanced economies have accounted for six of the rate reductions, with Israel cutting its rate three times, the European Central Bank twice and Sweden once.
    Meanwhile, rates have been raised 38 times, or 10 percent of all policy decisions, up from 9.3 percent at the end of June and 8.7 percent at the end of March.
    Among advanced economies, only New Zealand has raised its rate four times while emerging market central banks have raised rates 18 times, frontier market central banks three times and other central banks 12 times.

    LIST OF LAST WEEK'S CENTRAL BANK DECISIONS:

     


    TABLE WITH LAST WEEK'S MONETARY POLICY DECISIONS:

    COUNTRYMSCINEW RATEOLD RATE1 YEAR AGO
    AUSTRALIADM2.50%2.50%2.50%
    JAPANDMN/AN/AN/A
    INDONESIAEM7.50%7.50%7.25%
    CROATIAFM5.00%5.00%6.25%
    POLANDEM2.00%2.50%2.50%
    UNITED KINGDOMDM0.50%0.50%0.50%
    TAJIKISTAN 6.90%5.90%5.50%
    PERUEM3.50%3.50%4.25%

    This week (Week 42) seven central banks or monetary authorities are scheduled to decide on monetary policy: Uganda, Singapore, South Korea, Serbia, Egypt, Chile and Sri Lanka.

    TABLE WITH THIS WEEK'S MONETARY POLICY DECISIONS:

    COUNTRYMSCIDATECURRENT RATE1 YEAR AGO
    UGANDA 14-Oct11.00%12.00%
    SINGAPOREDM14-OctN/AN/A
    SOUTH KOREAEM15-Oct2.25%2.50%
    SERBIAFM16-Oct8.50%10.50%
    EGYPTEM16-Oct9.25%8.75%
    CHILEEM16-Oct3.25%4.75%
    SRI LANKAFM17-Oct6.50%6.50%

    www.CentralBankNews.info

    Oct 13 1:18 AM | Link | Comment!
  • Monetary Policy Week In Review – Sep 29-Oct 3, 2014: Policymakers Relaxed Over Dollar Rise, Romania Cuts Rate

    The main theme in global monetary policy last week was the continuing rise in the U.S. dollar as investors adjust to the widening split in policy cycles among major advanced economies.
    So far, policymakers appear relaxed about the dollar's appreciation against a broad spectrum of currencies - not just against the euro, yen and sterling, but also most emerging market currencies - as its rise boost the weakest economies, has been fairly gradual and long-awaited.
    At Thursday's press conference in Naples, Italy, Mario Draghi, president of the European Central Bank (ECB), said the change in exchange rates is the result of differing business cycles and thus in monetary policies.
    The euro dropped further to around 1.25 to the dollar at the end of last week, a level not seen since August 2012 when the euro zone was mired in recession with the ECB cutting rates its rate by 25 basis points in July to 0.75 percent.
    Haruhiko Kuroda, governor of the Bank of Japan, echoed Draghi's sentiment, saying the yen's weakening was broadly positive for the country's economy as long as it reflected the underlying fundamentals.
    The only change in policy rates last week was by the National Bank of Romania, which continued its easing cycle to help boost inflation and demand.
    The other five central banks that met last week - the ECB, the Reserve Bank of India, the Central Bank of Iceland, the National Bank of Angola and the National Bank of Rwanda - all maintained their policy rates.
    Through the first 40 weeks of this year, the 90 central banks followed by Central Bank News have cut their policy rates 50 times, or 13.5 percent of all policy decisions, up from 12 percent at the end of the first half and 12 percent at the end of the first quarter.
    Meanwhile, rates have been raised 37 times, or 10 percent of all policy decisions, up from 9.3 percent at the end of June and 8.7 percent at the end of March.

    LIST OF LAST WEEK'S CENTRAL BANK DECISIONS:

     


    TABLE WITH LAST WEEK'S MONETARY POLICY DECISIONS:

    COUNTRYMSCINEW RATEOLD RATE1 YEAR AGO
    ANGOLA 8.75%8.75%9.75%
    INDIAEM8.00%8.00%7.50%
    ROMANIAFM3.00%3.25%4.25%
    ICELAND 6.00%6.00%6.00%
    RWANDA 6.50%6.50%7.00%
    EURO AREADM0.05%0.05%0.50%

    This week (Week 41) eight central banks are scheduled to decide on monetary policy: Australia, Japan, Indonesia, Croatia, South Korea, Poland, the United Kingdom and Peru.

    While both South Korea and Poland are expected to cut their rates, most of the attention in financial markets is likely to be focused on the annual meetings of the International Monetary Fund (NYSE:IMF) and the World Bank in Washington D.C.

    On Tuesday the IMF will release its latest World Economic Outlook (WEO).

    TABLE WITH THIS WEEK'S MONETARY POLICY DECISIONS:

    COUNTRYMSCIDATECURRENT RATE1 YEAR AGO
    AUSTRALIADM7-Oct2.50%2.50%
    JAPANDM7-OctN/AN/A
    INDONESIAEM7-Oct7.50%7.25%
    CROATIAFM7-Oct5.00%6.25%
    SOUTH KOREAEM8-Oct2.25%2.50%
    POLANDEM8-Oct2.50%2.50%
    UNITED KINGDOMDM9-Oct0.50%0.50%
    PERUEM9-Oct3.50%4.25%

    www.CentralBankNews.info

    Oct 05 5:59 PM | Link | Comment!
  • Monetary Policy Week In Review – Sep 22-26, 2014: Trinidad Joins Central Banks Adjusting Policy Pre-Fed Rise

    Trinidad and Tobago's central bank became the latest to adjust its policy rate last week ahead of the looming change in U.S. monetary policy, raising its repo rate to prevent capital from seeking higher yields abroad, a move that would put pressure on its exchange rate and spark inflation.
    The growing prospect of a hike in U.S. rates by mid-2015 was also the main feature of global financial markets last week, with volatility jumping, stock markets gyrating and the U.S. dollar extending its gains on the back of an upward revision of U.S. second quarter growth figures.
    Major emerging markets, such as Turkey, India and South Africa, were hit by a change in the flow of global liquidity last summer and this January, and Trinidad's move this week serves as another reminder of how the Fed's policy stance reaches into every single crevice of global financial markets.

    The Central Bank of Trinidad and Tobago raised its benchmark repo rate by 25 basis points to 3.0 percent, its first change in rates since September 2012, "to pre-empt a potential rise in inflationary pressures and to mitigate higher portfolio outflows."
    The central bank said the Fed's statement after the Sept. 17 meeting of its Federal Open Market Committee (FOMC) had altered market expectations about the start to higher U.S. rates as its communication suggested a change in policy stance would come sooner than anticipated, with a gradual increase in rates around mid-2015.
    This had resulted in an immediate rise in U.S. Treasury yields that made U.S. dollar assets more attractive relative to Trinidad and Tobago assets.
    "It has become necessary to enhance the appeal of TT dollar assets which have lower returns in relation to U.S. dollar assets, as returns on the latter will be bolstered the Fed's expected monetary policy actions are realized," Trinidad's central bank said.

    On Sept. 17 the FOMC had confirmed that it expected to conclude its asset purchase program at its next meeting in October and repeated its guidance that rates would be maintained for "a considerable time" after the asset purchase program ends.

    However, the statement also showed an increase in the number of FOMC participants that expect the first rise in the fed funds rate in 2015 to 14 from 12 members in June. In addition, FOMC members' median estimate for the fed funds rate - illustrated by the now infamous but slightly confusing dot plot chart - rose to 1.375 percent end-2015 from June's estimate of 1.125 percent.

    In addition to Trinidad and Tobago, Morocco's central bank also changed its rate last week, cutting it by 25 basis points for the first time since March 2012, to boost growth while domestic inflation - just as global inflation - remains low, reflecting the recent decline in global commodity prices.
    But the other 12 central banks that deliberated monetary policy last week retained their policy rates, with several pointing to the uneven pace of global economic growth, the escalation of geopolitical conflicts and the uncertainty surrounding the timing of Fed interest rate rises.
    Through the first 39 weeks of this year, the 90 central banks followed by Central Bank News have cut their policy rates 49 times, or 13.5 percent of all policy decisions, up from 12 percent at the end of the first half and 12 percent at the end of the first quarter.
    Meanwhile, rates have been raised 37 times, or 10.2 percent of all policy decisions, up from 9.3 percent at the end of June and 8.7 percent at the end of March.
    The Global Monetary Policy Rate (GMPR), the average nominal rate by 90 central banks, remained at 5.54 percent, up from 5.53 percent at the end of June and 5.53 percent end-March.

    LIST OF LAST WEEK'S CENTRAL BANK DECISIONS:

     


    TABLE WITH LAST WEEK'S MONETARY POLICY DECISIONS:

    COUNTRYMSCINEW RATEOLD RATE1 YEAR AGO
    ISRAELDM0.25%0.25%1.00%
    SRI LANKAFM6.50%6.50%7.00%
    ARMENIA 6.75%6.75%8.50%
    HUNGARYEM2.10%2.10%3.60%
    MOROCCOFM2.75%3.00%3.00%
    ALBANIA 2.50%2.50%3.50%
    GEORGIA 4.00%4.00%3.75%
    TURKEYEM8.25%8.25%4.50%
    FIJI 0.50%0.50%0.50%
    CZECH REPUBLICEM0.05%0.05%0.05%
    TAIWANEM1.88%1.88%1.88%
    BOTSWANA 7.50%7.50%8.00%
    COLOMBIAEM4.50%4.50%3.25%
    TRINIDAD & TOBAGO 3.00%2.75%2.75%

    This week (Week 40) five central banks are scheduled to decide on monetary policy: Angola, India, Romania, Iceland and the European Central Bank (ECB).

    TABLE WITH THIS WEEK'S MONETARY POLICY DECISIONS:

    COUNTRYMSCIDATECURRENT RATE1 YEAR AGO
    ANGOLA 29-Sep8.75%9.75%
    INDIAEM30-Sep8.00%7.50%
    ROMANIAFM30-Sep3.25%4.25%
    ICELAND 1-Oct6.00%6.00%
    EURO AREADM2-Oct0.05%0.50%

    www.CentralBankNews.info

    Sep 28 2:10 PM | Link | Comment!
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