Monetary Policy Week in Review – Mar 30, 2013: Chance of Global Crises Eases as 3 Banks Cut Rates, 8 Hold, 1 Raises
by Peter Nielsen, Central Bank News
Last week 12 central banks took policy decisions with three banks cutting rates (Vietnam, Hungary and Georgia), eight keeping rates on hold (Israel, Angola, Turkey, Morocco, Taiwan, Zambia, Czech Republic and Romania) and Tunisia becoming the fifth central bank to raise rates this year.
The main message gleaned from central banks last week was that the global economy continues to recover, but every time it seems to pick up a little steam, confidence is undermined by developments in Europe, the only major risk to a sustained recovery.
But like a resilient boxer, the global economy dusts itself off and gets back on its feet, adjusting to the fact that large bank depositors in Europe may have to share the costs of future bank bailouts with tax payers, the main lesson from Cyprus.
After the shock from this major but ultimately positive policy shift, there was a sense of relief that Europe had muddled through, once again, and financial markets had taken the events in stride.
“It appears that there has been a decline in the probability of a crises occurring, a development which has reduced the high level of uncertainty that prevailed in the last year,” the Bank of Israel said in its statement.
But as both Israel and the Reserve Bank of Australia (RBA) acknowledged, the global economic picture remains mixed and “it is too early to say whether the improved market sentiment over the past six months is the beginning of a sustained recovery, or merely a temporary upswing.”
The challenges facing Europe’s policy makers is considerable. Not only do they have to restore financial health to governments and banks, they must also find ways to strengthen economic growth at a time of growing challenges from emerging markets.
“The renewed market tension associated with the handling of the sovereign and banking crisis in Cyprus in recent weeks has provided a reminder of the political, economic and social challenges of resolving the pervasive fiscal and banking sector problems,” the RBA said in its financial review.
In the latest manifestation of the structural shift in the global economy – illustrated by a stagnating Europe and growing emerging markets - the leaders of Brazil, Russia, India, and South Africa and China agreed to establish a New Development Bank.
The leaders of these five countries, known as the BRICS countries, acknowledged that their infrastructure has to be improved but currently there is insufficient long-term and foreign investment in capital stock.
Acknowledging their role and responsibility for global governance, the BRICS leaders said a bank, which now will be established, would use global financial resources more productively and thus make a positive contribution in boosting global demand.
They also agreed to establish a $100 billion financial reserve arrangement that would "help BRICS countries forestall short-term liquidity pressures, provide mutual support and further strengthen financial stability," the leaders said in their March 27 Durban declaration.
The Contingent Reserve Arrangement (CRA) would help strengthen the global financial safety net during times of market turmoil.
Through the first 13 weeks of the year, 77 percent of the 125 policy decisions taken by the 90 central banks followed by Central Bank News lead to unchanged rates, marginally down from 78 percent after the first 11 weeks.
Globally, 19 percent of policy decisions this year have lead to rate cuts, largely by central banks in emerging economies, a ratio that was steady from last week.
Of the 24 rate cuts worldwide so far this year, 42 percent have come from central banks in emerging markets and the remainder from frontier markets and other countries.
No central banks in developed markets have cut rates this year, but this is largely because many of those central banks slashed rates to effectively zero five years ago and then switched to various forms of so-called quantitative easing to stimulate demand.
Next week (week 14) features six central bank policy decisions, including Australia, Thailand, Uganda, Japan, United Kingdom and the euro area.