April 29th, 2014
Monetary Policy Week in Review – 21-24 April 2014
by Peter Nielsen, Central Bank News
The central banks of New Zealand, Denmark and Colombia raised key interest rates last week, strengthening this year's trend toward higher rates as global monetary policy slowly unwinds from years of ultra-low rates and extraordinary policy measures.
Russia's central bank also raised its policy rate last week, but this was mainly in response to heightened inflationary pressures from the falling ruble as spooked investors continue to withdraw funds due to a worsening of the conflict with Ukraine and the West.
Last week's rate hikes raised the number of central bank rate increases so far this year to 17, topping the 15 rate cuts, cementing this year's trend toward higher rates as the global economy recovers and the U.S. Federal Reserve pulls back on extraordinary stimulus.
The Global Monetary Policy Rate (GMPR), the average nominal rate of the 90 central banks followed by Central Bank News, rose to 5.58 percent at the end of the week, up from 5.53 percent at the end of March and 5.51 percent at the end of January.
In the month of April, five central banks have changed policy rates (Brazil, Ukraine, New Zealand, Russia and Colombia) with every decision leading to higher rates while no central banks have cut rates.
Denmark is not included in this list as it raised its deposit rate and not its benchmark lending rate. Nevertheless, the move by Denmark's Nationalbank is significant because it concludes the bank's experiment with negative deposit rates and shows how central banks are unwinding the extraordinary measures they took in the wake of the global financial crises and Europe's sovereign debt crises.
Denmark introduced the negative deposit rate for banks on July 6, 2012 when it cut the rate for the third time that year to minus 0.20 percent.
The move came at the height of the euro zone's crises in an attempt to reduce the inflow of capital and the resulting upward pressure on its crown currency from investors that were seeking a safe haven at a time when serious questions were being raised about the survival of the single currency.
It was only European Central Bank President Mario Draghi's comment on July 26, 2012 that the "ECB is ready to do "whatever it takes" that the tide turned and investors' s confidence in the euro was restored.
Capital slowly began to return to euro zone assets, easing the pressure on the crown and by Jan. 25, 2013 the Danish central bank was able to take the first step in returning to normal, raising it to minus 0.10 percent.
Last week's 15 basis point increase in the Danish deposit rate to a positive 0.05 percent comes after a weakening of the crown in recent months as investors have been attracted to relatively higher short-term euro rates than crown rates.
By raising its deposit rate to just above the ECB's zero percent deposit rate, the Danish central bank appeared to be signaling that it is comfortable with a slightly higher crown.
Denmark's unwinding of its negative deposit rate also garnered interest because it comes as the ECB is wrestling with various options for weakening the euro to stimulate economic activity, including a negative deposit rate.
New Zealand's second consecutive rate rise of 25 basis points, bringing its Official Cash Rate (OCR) to 3.0 percent, was widely flagged and further rate increases are expected to curb inflation.
However, the Reserve Bank of New Zealand (RBNZ) cautioned investors who think rates will be raised in a consistent and predictable manner, regardless of economic reality. In addition to repeating its guidance from March that the "speed and extent" of future rate rises will depend on data and inflationary pressures, the RBNZ added last week that it would also take into account the impact of the high exchange rate on inflation.
Colombia's unexpected 25 basis point increase in its benchmark intervention rate to 3.50 percent was significant for several reasons. First, because it was evidence of the Central Bank of Colombia's confidence in the global economic recovery. Second, because it illustrated how the period of extraordinary accommodative monetary policy is being unwound worldwide. Third, because it showed confidence and foresight by the central bank to raise rates now, in what it described as a "prudent" move, given the long time it takes for its policy rates to filter through to the economy.
Russia's central bank also took investors by surprise by its second rate rise in as many months. The Bank of Russia raised its policy rate by 150 basis points on March 3 to calm financial markets, nervous over the crises with Ukraine, and last week raised the rate by another 50 basis points despite the worsening economy to keep a lid on accelerating inflation.
Through the first 17 weeks of this year, policy rates have been raised 17 times, or 10.8 percent of this year's 157 policy decisions by the 90 central banks followed by Central Bank News. This number does not include Denmark's central bank which only raised its deposit rate and not its benchmark lending rate. Policy rates have been cut 15 times so far this year, or 9.6 percent of this year's policy decisions, down from 10.1 percent the previous week. LIST OF LAST WEEK'S CENTRAL BANK DECISIONS:
- Sri Lanka maintains rates, poised for strong performance
- Botswana holds rate, inflation seen in 3-6% target range
- Thailand holds rate, to ensure stance supports growth
- New Zealand raises rate another 25 bps to 3.0%
- Turkey holds repo rate but trims late liquidity rate 150 bps
- Denmark raises rate 15 bps, ends period of negative rates
- Fiji holds rate, will change if challenge to twin targets
- Russia raises rate by 50 bps, no plans to cut for months
- Mexico holds rate, watching inflation expectations, slack
- Colombia raises rate 25 bps to avoid sharp hikes later
LIST OF OTHER STORIES LAST WEEK:
TABLE WITH LAST WEEK'S MONETARY POLICY DECISIONS:
|COUNTRY||MSCI||NEW RATE||OLD RATE||1 YEAR AGO|
|DENMARK (DEPO RATE)||DM||0.05%||-0.10%||-0.10%|
This week (Week 18) eight central banks will be deciding on monetary policy, including Israel, Angola, Egypt, Mauritius, Hungary, Japan, the United States and Albania. TABLE WITH THIS WEEK'S MONETARY POLICY DECISIONS:
|COUNTRY||MSCI||DATE||CURRENT RATE||1 YEAR AGO|