Serbia Returns to Easing as Malaysia, Philippines Set to Tighten

Monetary Policy Week in Review – May 5-9, 2014

by Peter Nielsen, Central Bank News

Last week in global monetary policy, Serbia took advantage of the relative calm in financial markets to return to its easing campaign despite the simmering conflict in the Ukraine and the ongoing tapering of quantitative easing by the U.S. Federal Reserve.

The Bank of Serbia (NBS) puts its easing cycle on hold in January and has maintained rates for the last four months due to a bout of volatility in global financial markets as investors adjusted to the start of the Fed’s reduction in asset purchases.

Political and social unrest in Ukraine, followed by the annexation of Crimea by Russia in March, then added geopolitical tensions to the mix, convincing the NBS that it should maintain high enough interest rates to ensure that global investors wouldn’t suddenly abandon the dinar currency.

But buoyed by falling inflation and a convincing parliamentary victory by the Serbian Progressive Party and its commitment to deficit cuts, the dinar was suddenly attracting investors and the NBS was forced to intervene on at least six occasions to limit its gains.

The Serbian central bank’s relief was almost audible last week as it stated that:

“No negative impact on the country’s risk premium and external trade has so far resulted from the Fed’s QE tapering and geopolitical tensions arising from the Ukrainian crises.”

Serbia’s policy rate was cut by 50 basis points to 9.0 percent, following 2013’s cut of 175 basis points, as inflation fell to 2.3 percent in March and then 2.1 percent in April, below the central bank’s tolerance range of 2.5 to 5.5 percent inflation.

Apart from Serbia, 14 central banks maintained their policy rates last week though both Malaysia and the Philippines are now clearly on a policy tightening path.

Bank Negara Malaysia (BNM) maintained its Overnight Policy Rate at 3.0 percent but warned that financial imbalances were brewing and said that:

“Going forward, the degree of monetary accommodation may need to be adjusted to ensure that the risks arising from the accumulation of these imbalances would not undermine the growth prospects of the Malaysian economy.”

Bangko Sentral ng Pilipinas (BSP) also maintained its policy rate at 3.50 percent but raised its reserve requirement by a further 100 basis points due to solid domestic economic activity and “to help mitigate potential risks to financial stability that could arise from the strong growth in domestic liquidity.”

The Philippine central bank already raised its reserve requirements by 100 basis points in March and has now raised them to 20 percent. The other main events in global monetary policy last week were Fed Chair Janet Yellen’s renewed commitment to accommodative policy and European Central Bank President Mario Draghi’s statement that the “Governing Council is comfortable with acting next time, but before we want to see the staff projections that will come out in early June.”

During their April meeting, the ECB council discussed what monetary policy tools, including extraordinary measures, it could employ to tackle the risk of a prolonged period of inflation. ECB policymakers are concerned that a further rise in the euro’s exchange rate will push down import prices, and thus inflation, and also retard the economic recovery by making exports less internationally competitive.

Last week the council continued this discussion, possibly concerned that a campaign of jawboning since early April really didn’t put much of a dent in the euro’s exchange rate.

But Draghi’s hint that the ECB may act in June seems to have left more of an impression on markets. The euro is down about 1 percent since the ECB press conference on May 8, trading at 1.376 today, down from 1.391 prior to the news conference. LIST OF LAST WEEK’S CENTRAL BANK DECISIONS:

• Australia maintains rate, still sees period of stable rates
• Romania holds rate, sees inflation 3.3 percent end-2014
• Georgia holds rate on geopolitical risks, wants to tighten
• Poland holds rate, repeats steady rate until end-Q3
• Czech cuts inflation forecast, may extend cap on koruna
• Norway holds rate, repeats rate steady till summer 2015
• Philippines holds rate, but raises RR another 100 bps
• Malaysia holds rate but warns it may have to raise rates
• BOE maintains rate, stock of assets, as expected
• Serbia cuts rate 50 bps, sees room for further easing
• Indonesia holds rate, keeps close watch on inflation risks
• ECB holds rates, repeats ready to ease further
• Korea holds rate, inflation low for time being
• Peru holds rate, inflation seen converging to target
• Zambia holds rate at 12%, sees lower Q2 inflation

TABLE WITH LAST WEEK’S MONETARY POLICY DECISIONS:

This week (Week 20) four central banks will be deciding on monetary policy, including Mozambique, Armenia, Croatia and Chile. TABLE WITH THIS WEEK’S MONETARY POLICY DECISIONS:

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