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  • 2011 Central Bank Inflation Target Report Card
    This report provides an update on where inflation is tracking in countries where the central bank has an inflation target. Central Bank News has compiled a table of countries/central banks that have publicly announced an official inflation target. In some cases the target is a government target, but in many cases it is one of the central bank's key performance indicators. Of the 39 countries which have inflation targets that Central Bank News is monitoring; 22 last reported inflation above target, 8 had inflation below target, and 9 reported inflation within their target range. Note, the inflation figures in the table below are all on a headline, or gross, inflation basis.

    Of those that saw inflation above target, the standouts were Uganda (27% vs target 7%), Turkey (10.5% vs target 5.5%), Botswana (9.2% vs target range 3-6%), Iceland (5.2% vs 2.5%), and Uruguay (8.6% vs target range 4-6%). Of those with inflation below target, the standouts were Georgia (2% vs target 6%), Norway (0.2% vs target 2.5%), Albania (1.7% vs target 3%), Japan (-0.2% vs target 1%), and Switzerland (-0.7% vs target range 0-2%).

    The chart below shows the change in inflation versus target, between the most recently reported inflation figures and the end of 2010 inflation figures (from the IMF). Of the 39 countries, 23 saw inflation go above target, or go higher above target, 10 saw inflation falling closer to target (2 fell into target range), while 6 saw inflation staying within target, and 5 saw inflation fall below target.

    Compared to the previous report on inflation vs target as of June 2010, inflation momentum against target has slowed and in some cases reversed. This trend lines up with the themes noted in the Global Interest Rate Movements in 2011 report, which noted an increasing shift to monetary policy easing biases. The trend of waning inflation impulse vs target is likely to be welcomed by many as the threat of economic and financial market disruption from the European sovereign debt crisis persists and as global growth decelerates somewhat, as lower inflation readings compared to targets will allow greater policy flexibility.

    However, the threat of a resurgence in inflation cannot be discounted either, particularly as some central banks have engaged in significant balance sheet expansion (e.g. ECB, Bank of England, Swiss National Bank, Bank of Japan, and the US Federal Reserve). Indeed, if further rounds of significant quantitative easing are undertaken, the unintended consequence may well be a rise in commodity price inflation, which for lesser-developed nations has a more direct flow through to general inflation.

    But for the first half of 2012 at least, it appears that globally, on balance, the economic growth risks are skewed more to the downside than the upside; and the same can be said of the inflation outlook. Thus this half is also likely to see further policy easing on average. The second half of 2012 will likely be a distinctly binary set of scenarios that depend on the absence or otherwise of event risk and further deterioration of global growth momentum; for now the risks appear to be finely balanced.

    What is inflation targeting?
    Inflation targeting is an often cited goal of monetary policy, alongside other goals such as maximizing GDP growth, optimal employment, and financial stability. While there is some debate about the merits of inflation targeting, the benefits often cited of explicit inflation targeting include greater certainty and transparency of central bank interest rate decisions, price stability, and ultimately a lower neutral interest rate, provided inflation can be contained within a reasonable range. See the Wikipedia entry on inflation targeting for a summary of the issues and debate on explicit inflation targeting in monetary policy.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: economy
    Feb 01 12:12 PM | Link | Comment!
  • Monetary Policy Week In Review - 28 January 2012
    The past week in monetary policy saw 2 central banks cutting interest rates (Israel -25bps to 2.50%, and Thailand -25bps to 3.00%), and 1 bank cutting its reserve ratio (India cut CRR 50bps to 5.50%). Meanwhile 7 central banks held rates unchanged (Japan 0.10%, India 8.50%, Hungary 7.00%, Turkey 5.75%, New Zealand 2.50%, USA 0-0.25%, and Hong Kong 0.50%). The week also featured the US Federal Reserve announcing an inflation target of 2 percent and releasing its inaugural economic forecasts as part of its efforts to improve transparency.

    Following are some of the key quotes and comments from the banks that met, often these comments give an insight into how the central bankers are thinking and how their economies are faring.

    • US Federal Reserve (Held rate at 0-0.25%): "To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."
    • Reserve Bank of India (Held rate at 8.50%): "In reducing the CRR, the Reserve Bank has attempted to address the structural pressures on liquidity in a way that is not inconsistent with the prevailing monetary stance. In the two previous guidances, it was indicated that the cycle of rate increases had peaked and further actions were likely to reverse the cycle. Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature to begin reducing the policy rate."
    • Bank of Japan (Held rate at 0.10%): "Japan's economic activity has been more or less flat, mainly due to the effects of a slowdown in overseas economies and the appreciation of the yen. As for domestic demand, business fixed investment has been on a moderate increasing trend and private consumption has remained firm. On the other hand, exports and production have remained more or less flat, due to the slowdown in overseas economies and the yen's appreciation as well as the remaining effects of the flooding in Thailand. Meanwhile, although global financial markets remain under heavy strain, financial conditions in Japan have continued to ease."
    • Bank of Israel (cut rate 25bps to 2.50%): "The decision to cut the interest rate to 2.5 percent for February is consistent with the interest rate policy aimed at keeping inflation within the price stability target range and is intended to support real economic activity, against the background of the slowdown in global demand."
    • Bank of Thailand (cut rate 25bps to 3.00%): "The MPC assessed that inflationary pressure remains contained, while headwinds from the global economy continue to pose risks to Thailand's economic growth. The MPC therefore voted unanimously to reduce the policy rate by 0.25 percent, from 3.25 percent to 3.00 percent per annum, effective immediately. With private sector confidence improving but still fragile, this policy accommodation should help accelerate the return of economic activity to normal levels."

    Looking at the central bank calendar, the week ahead is relatively quiet with just a handful of emerging market and frontier market central banks meeting to review policy settings. Aside from central bank meetings, there will be further European summits on the debt crisis, and the release of high frequency economic indicators such as the Purchasing Manager's Index (PMI) for many countries. The week also features FOMC Chairman, Ben Bernanke, testifying before the House Budget Committee - this will be watched by many for any clues of further quantitative easing.

      • MNR - Malaysia (Bank Negara Malaysia) expected to hold at 3.00% on the 31st of Jan
      • COP - Colombia (Bank of Colombia) expected to hold at 4.75% on the 31st of Jan
      • NGN - Nigeria (Central Bank of Nigeria) expected to hold at 12.00% on the 31st of Jan


    Article source:

    Jan 27 4:21 PM | Link | Comment!
  • Monetary Policy Week in Review - 21 Jan 2012 - The Rate Cuts Begin
    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

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 20 4:28 PM | Link | Comment!
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