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  • Monetary Policy Week In Review – Apr 14-18, 2014: Ukraine Hikes Rate As ECB Takes Gloves Off Over Euro

    Last week Ukraine's central bank boosted its policy rate to support its embattled hryvnia currency while six other central banks maintained their rates, including Serbia's central bank which became the latest bank to postpone a rate cut for fear of triggering capital outflows and disrupting the relative calm in global financial markets.
    Six weeks after Russia's central bank temporarily raised its rate by 150 basis points, the National Bank of Ukraine raised its benchmark discount rate by 300 points as the economic fallout from the political crises between the two countries widens.
    With financial markets so far digesting this year's shift in U.S. monetary policy with less hiccups than expected and the economic slowdown in China proceeding largely according to plan, the crises in Ukraine is the only major uncertainty facing the global economy.
    So far, there has been limited global spillover from the Russia-Ukraine crises, with only neighboring Poland noticing a negative economic impact as its firms have revised down their forecasts for exports and view of current conditions.
    But it's clear that any further escalation of tensions in eastern Ukraine and new sanctions from the West against Russia have the potential to trigger a flight to safety and harm economic confidence.
    "The situation in Ukraine is one which, if not well managed, could have broader spillover implications," IMF Managing Director Christine Lagarde Lagarde warned earlier this month.
    Although Romania provides a physical buffer between Serbia and Ukraine, the Bank of Serbia is clearly worried that its currency, stocks and bonds would be engulfed by a flight to safety.
    The Serbian central bank has on several occasions cited the need to keep domestic assets relatively attractive to global investors and said last week that the decision to maintain the rate at 9.50 percent was "guided by instability in international financial markets and heightened uncertainties surrounding the current geopolitical tensions."
    The Bank of Mozambique in southern Africa also reflects this awareness of how fast sentiment in global financial markets can turn, saying it was maintaining a "prudent monetary policy" amid domestic and international risks.
    Next week's statement and policy decision by Russia's central bank is likely to be scrutinized for warnings from the central bank of the economic and financial repercussions of further political brinkmanship by President Vladimir Putin.

    Meanwhile in the euro zone, the single currency didn't take too seriously warnings of easier monetary policy by a string of European Central Bank (ECB) officials.
    After ECB Board Member Benoit Coeure on Friday, April 11 said "the stronger the euro, the more need for monetary accommodation," ECB President Mario Draghi on April 12 said a strengthening of the euro's exchange rate would require further monetary stimulus. This message was then later echoed by Christian Noyer of the Bank of France and ECB Board Member Yves Mersch.
    ECB policymakers were clearly hammering home the message from its April 3 statement that its council was "unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation."
    But the frequency and unanimity in the statements from ECB council members is unusual and appear to be coordinated.
    On April 3, when the ECB council last met, the euro was trading at 1.37 to the U.S. dollar. It then rose in the following days in response to the lack of any easing measures, ending the week just below 1.39 on Friday April 11.
    Draghi's reference to the euro and further easing came on Saturday and on Monday Noyer said the ECB was ready to use unconventional measures to fend off too low inflation.
    On Monday April 14 the euro eased slightly to 1.381 but it ended the week practically unchanged, down from 1.388 the previous Friday.
    On Thursday April 17 Mersch in Albania echoes the view that further euro strength would trigger a reaction by the ECB with France's economy minister then adding that he wants euro zone member countries to meet and discuss the euro and it's exchange rate needs to come down.

    But Mersch also gives an important clue to what might be behind that spate of coordinated comments about the strong euro.
    Mersch said Draghi on April 3 had "explicitly mentioned … developments in the foreign exchange markets, which have increasingly an impact on our inflationary price developments."
    He added that Draghi had made it very clear that if these developments, i.e. the euro's exchange rate, were to continue, this would "inevitably have to trigger a reaction by the ECB in order to maintain our accommodative monetary policy stance."
    What seems to have happened is that the wording of the statement issued by the ECB council was too balanced and thus wishy-washy in describing the harm a strong euro is doing to prices.
    Draghi then fails to convey to the press the ECB council's concern over the euro's strength.
    Looking at the transcript from the ECB press conference, Draghi's introductory statement makes only a passing reference to exchange rates.
    Draghi said the ECB council saw broadly balanced and limited upside and downside risks to the inflation outlook and "the possible repercussions of both geopolitical risks and exchange rate developments will be monitored closely."
    Hardly a statement that conveys concern over the euro to foreign exchange markets or the public.
    At the start of the press conference, Draghi refers to the same statement, saying "the exchange rate is very important for price stability, so much so that we have made an explicit reference to it in the introductory statement."
    "But, as I have said several times, it is not a policy target," Draghi adds, a reflection of the code of conduct that major central banks should not target exchange rates, and certainly not in public.
    "It is an increasingly important factor in our medium-term assessment of price stability, but it is not a policy target. In this sense, we do not link our medium-term assessment to a precise level of the exchange rate. It is part of the overall information that comes into play when we undertake our medium-term assessment," Draghi said.
    Out of respect for the rules among the Group of 20 leading economic powers and major central banks, Draghi and the ECB end up watering down their statement of the euro's exchange rate so much that financial markets fail to notice.
    Instead, headlines from the April 3 meeting by the ECB council are dominated by the message that the ECB has discussed, and is ready, to use some form of quantitative easing if inflation fails to accelerate.

    Through the first 16 weeks of this year, policy rates have been raised 14 times, or 9.5 percent of this year's 148 policy decisions by the 90 central banks followed by Central Bank News, up from 9.2 percent the previous week and 8.7 percent end-March but down from 10.1 percent end-February.
    Policy rates have been cut 15 times so far this year, or 10.1 percent of this year's policy decisions, down from 10.6 percent the previous week, and 14 percent at the end of February.




    MOZAMBIQUE 8.25%8.25%9.50%
    NAMIBIA 5.50%5.50%5.50%

    This week (Week 17) seven central banks will be deciding on monetary policy, including Thailand, Turkey, New Zealand, Egypt, Fiji, Russia and Mexico.


    NEW ZEALANDDM24-Apr2.75%2.50%
    FIJI 24-Apr0.50%0.50%

    Apr 20 6:22 PM | Link | Comment!
  • Monetary Policy Week In Review – Apr 7-11, 2014: 7 Central Banks Hold Rates, ECB Mulls Answer To Strong Euro

    Seven central banks lived up to expectations last week and held their policy rates steady as the focus of global monetary policy shifted to Washington D.C. and the spring meetings of the International Monetary Fund (NYSE:IMF) and the Group of 20 finance ministers and central bank governors.
    The G20 once again tiptoed around the issue of how individual central banks, such as the U.S. Federal Reserve, can limit some of the spillover effects of changes to its own policy on other countries.
    Compared with the G20's Sydney statement from February, when central banks were specifically mentioned, last week's statement didn't even mention central banks, a likely reflection of the fact that the Fed's tapering of its asset purchases so far has been less disruptive than expected.
    Here's the wording from last week's G20 statement:
    "We are strengthening our macroeconomic cooperation by further deepening our understanding of each other's policy frameworks and assessing the collective implications of our national policies across a range of possible outcomes. We will continue to provide clear and timely communication of our actions and be mindful of impacts on the global economy as policy settings are recalibrated."
    Here's the wording from the Sydney statement:
    "All our central banks maintain their commitment that monetary policy settings will continue to be carefully calibrated and clearly communicated, in the context of ongoing exchange of information and being mindful of impacts on the global economy."

    It was left to the European Central Bank (ECB) to provide some excitement, with two top ECB policymakers taking another step toward preparing financial markets for a policy response if the euro continues to strengthen.
    Earlier this month the ECB stressed that its governing council was unanimous and ready to use unconventional monetary instruments in addition to rate cuts to ward off the threat of deflation.
    On Friday ECB Executive Board Member Benoit Coeure told Bloomberg TV in Washington that "the stronger the euro the more need for monetary accommodation."
    As if to underscore that Coeure's statement was not just a personal opinion but the consensus view of ECB policy makers, ECB President Mario Draghi the day after told a news conference:
    "The strengthening of the exchange rate would require further monetary policy accommodation."
    In early Asian trading, the euro was quoted at $1.385, up almost 5 percent since the end of 2012 and 0.8 percent since the end of 2013 despite the more accommodative policy stance of the ECB compared with the Fed's tighter stance.

    Through the first 15 weeks of this year, policy rates have been raised 13 times, or 9.2 percent of this year's 141 policy decisions by the 90 central banks followed by Central Bank News, up from 8.7 percent end-March but down from 10.1 percent end-February.
    But global economic growth remains sluggish and inflation low, allowing some central banks to loosen their stance.
    Policy rates have been cut 15 times so far this year, or 10.6 percent of this year's policy decisions, down from 11 percent at the end of the previous week and 14 percent at the end of February.




    UNITED KINGDOMDM0.50%0.50%0.50%
    SOUTH KOREAEM2.50%2.50%2.75%

    This week (Week 16) six central banks will be deciding on monetary policy, including Singapore, Mozambique, Namibia, Canada, Serbia and Chile.

    MOZAMBIQUE 16-Apr8.25%9.50%
    NAMIBIA 16-Apr5.50%5.50%

    Apr 13 8:13 PM | Link | Comment!
  • Monetary Policy Week In Review – Mar 31-Apr 4: Brazil, Ghana Raise Rates As ECB Takes Step Toward Launching QE

    The central banks of Brazil and Ghana raised their policy rates last week as six other central banks left their rates unchanged, including the the European Central Bank (ECB), which nevertheless took a major step forward toward launching some form of unconventional monetary measure if inflation threatens to remain at the current low level.
    Despite the two rate rises, the Global Monetary Policy Rate (GMPR) - the average policy rate of 90 central banks followed by Central Bank News - remained steady at 5.56 percent from the end of March, but was up from 5.55 percent at the end of February and 5.53 percent at the end of January, illustrating how monetary policy worldwide is slowly but surely tightening.
    Through the first 14 weeks of this year, policy rates have been raised 13 times, or 9.7 percent of this year's 134 policy decisions by the 90 central banks, up from 8.7 percent from the previous week.
    But on a global scale, economic growth is still sluggish and inflation low, with the result that monetary policy is still being loosened in some countries. So far this year, policy rates have been cut 15 times, or 11 percent of this year's policy decisions, down from 12 percent at the end of the previous week and 14 percent at the end of February.

    The main events in global monetary policy last week were the policy decisions by the ECB and the Central Bank of Brazil.
    The ECB once again dashed hopes for a rate cut or some type of unconventional policy measure, such as quantitative easing or a negative deposit rate, amid renewed concerns over deflation.
    Nevertheless, the ECB took a major step forward in preparing financial markets and investors for the possibility of introducing some form of quantitative easing if inflation does not start to rise soon.
    Inflation in the euro zone fell to 0.5 percent in March from 0.7 percent in February and has now remained under 2 percent for the last 14 months. The ECB targets inflation of close to, but below 2 percent.
    But ECB President Mario Draghi dismissed concerns of Japanese-style deflation, telling a press conference that "frankly we do not see the risks of deflation as having increased."
    Explaining that the March inflation figure was impacted by this year's timing of Easter along with the base effect of energy prices, Draghi said the ECB and financial markets are still expecting inflation to rise as the economy improves. At this point, deflation is not priced into markets.
    However, the ECB council is clearly worried that the longer inflation remains at such a low level, it could lead to a fall in inflationary expectations. This would pave the way for consumers to postpone purchases and thus further delay the economic recovery.
    "It is quite obvious that the Governing council is looking at this prolonged period of low inflation and it is quite obvious that the longer the period of low inflation, the higher the risk for inflation expectations in the medium and long term," Draghi told the press conference.
    In an apparent reflection of the Bundesbank's recent acceptance of quantitative easing, Draghi said the ECB council was "unanimous in its commitment to using also unconventional measures," pointedly saying the ECB mandate would allow it to engage in quantitative easing.
    In contrast to the council's meeting last month, the ECB this time specifically discussed various forms of quantitative easing during what Draghi described as "a very rich and ample discussion."
    There are two reasons the ECB has been reluctant to undertake some form of quantitative easing, such as buying government or private sector bonds, as carried out by the Bank of Japan, the U.S. Federal Reserve and the Bank of England.
    The first and primary reason is that euro zone firms, unlike U.S. companies, rely much more on bank lending than capital markets for funds. When the Fed, for example, purchases bonds, it quickly affects the cost of credit whereas the health of banks is more critical to euro zone business.
    "In our case, the economy is based on the bank lending channel and therefore the programme has to be carefully designed in order to take this element into account," Draghi said, showing just how far along the ECB is in considering the details of its form of quantitative easing.
    The second reason that the ECB has been reluctant to engage in quantitative easing by buying sovereign bonds is that it would be dealing with 18 national bond markets, making such an operation much more complex to design and execute.

    In Brazil, the central bank raised its rate for the ninth time since embarking on its tightening campaign in April last year but signaled that is now ready to take a breather to judge the impact on inflation from its 375 basis-point hike in the benchmark Selic rate.
    As usual, the statement from the Central Bank of Brazil's policy committee, known as Copom, was slightly cryptic but the message was received by financial markets and the real currency fell.
    In its statement, the central bank dropped earlier references to rate rises as a continuation of a process that got under way in April 2013 and inserted that the decision was taken "at this moment," conveying the impression that the latest rate rise was more of a one-off than part of a tightening cycle.
    In addition, Copom also said its next move would be based on "the evolution of the macroeconomic scenario," signaling that the rate could be maintained in May unless inflation accelerates sharply.
    Brazil's inflation rate rose in February to 5.68 percent from 5.59 percent, but this was partly due to higher food prices from the impact of severe drought in southern Brazil.
    And although the central bank has already raised its 2014 inflation forecast to 6.1 percent from 5.6 percent as a result, inflation is still within the central bank's tolerance range of 2.5 to 6.5 percent and the economy is clearly in need of stimulation.




    FIJI 0.50%0.50%0.50%
    ANGOLA 9.25%9.25%10.00%
    UGANDA 11.50%11.50%12.00%
    GHANA 18.00%18.00%15.00%
    EURO AREADM0.25%0.25%0.75%

    This week (Week 15) eight central banks will be deciding on monetary policy, including Japan, Indonesia, Croatia, Sweden, Poland, United Kingdom, South Korea and Peru.

    UNITED KINGDOMDM10-Apr50%50%
    SOUTH KOREAEM10-Apr2.50%2.75%

    Apr 06 10:46 PM | Link | Comment!
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