April 21st, 2014
Monetary Policy Week in Review: 14-18 April 2014
by Peter Nielsen, Central Bank News
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:
"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"
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.
LIST OF LAST WEEK'S CENTRAL BANK DECISIONS:
- Singapore maintains FX policy, ready to curb volatility
- Ukraine raises rate 300 bps to 9.5% to boost hryvnia
- Namibia keeps rate on "encouraging" 2014 prospects
- Canada holds rate, change depends on new information
- Mozambique holds rate, maintains "prudent" policy
- Serbia holds rate, sees room for cuts on lower deficit
- Chile holds rate steady at 4%, maintains easing bias
TABLE WITH LAST WEEK'S MONETARY POLICY DECISIONS:
|COUNTRY||MSCI||NEW RATE||OLD RATE||1 YEAR AGO|
This week (Week 17) seven central banks will be deciding on monetary policy, including Thailand, Turkey, New Zealand, Egypt, Fiji, Russia and Mexico. TABLE WITH THIS WEEK'S MONETARY POLICY DECISIONS:
|COUNTRY||MSCI||DATE||CURRENT RATE||1 YEAR AGO|