Hungary, Albania Extend Easing, Columbia Ups Rate Again

Monetary Policy Week in Review, 26-20 May 2014

by Peter Nielsen, Central Bank News

Last week in global monetary policy, Hungary and Albania extended their easing cycles due to low inflationary pressures while Colombia raised its rate for the second consecutive month in anticipation of accelerating inflation.

Meanwhile, the major themes of this year in global finance continued to evolve last week, with growing signs the European Central Bank (ECB) will embark on some form of extraordinary accommodative measures this week, hawkish talk around the Bank of England (BOE), concern over the lack of global economic and monetary cooperation, and a possible extension of the Bank of Japan’s (BOE) aggressive easing campaign past 2015.

But the main feature of monetary policy last week came from the Central Bank of Brazil, which called a halt to its tightening campaign after nine rate rises in a row.

Since April 2013, Brazil’s central bank has raised its rate by a total of 375 basis points, pushing the key Selic rate to 11.0 percent.

The pause was widely anticipated but was still controversial as inflation in April of 6.28 percent is way above the bank’s 4.5 percent target and close to the upper tolerance limit of 6.5 percent. In addition, inflation is also expected to rise further in coming months due to prices increases in connection with the World Cup soccer tournament from mid-June to mid-July.

Just as Turkey’s central bank is battling to shore up its independence and credibility amidst intense political pressure, economists suspect Brazil’s central bank may have let the presidential election in October influence its decision to pause its tightening campaign now.

In Hungary, the central bank cut its rate for the 22nd time in a row, but is inching ever so closer to a neutral stance, and will let next month’s rate decision rest on the outcome of its new economic forecast.

Colombia’s central bank is proving to be very pro-active, once again saying a gradual increase in rates now should reduce the need for larger and more sudden changes in future policy given the lag with which monetary policy impacts economic activity.

The Central Bank of Colombia has now raised rates by 50 basis points this year, (25 basis points in May and April) with its benchmark intervention rate at 3.75 percent.

Meanwhile, Colombia’s inflation rate rose for the fifth consecutive month in April to 2.72 percent, slowly, but surely approaching the bank’s 3.0 percent midpoint target. Through the first 22 weeks of this year, central banks have cut their policy rates 22 times, or 10.6 percent of this year’s 206 monetary policy decisions taken by the 90 central banks followed by Central Bank News.

This is up from 10.1 percent the previous week and 9.6 percent at the end of April but below the 11.9 percent seen at the end of March.

During the same period, policy rates have been raised 19 times, or 9.2 percent, marginally up from 9.1 percent the previous week.

Central banks in emerging markets continue to be very active in responding to the ebb and flow of global liquidity, accounting for just over half of this year’s rate increases (10 of the 19 rate rises worldwide) but only 40 percent of this year’s rate cuts (9 of the 22 rate cuts globally).

Frontier market central banks account for 5 of this year’s rate cuts compared with only 1 rate rise while central banks in other markets have cut rates 7 times and raised rates 6 times. Central banks in developed or advanced markets have raised rates twice (New Zealand) and cut rates once (Israel). LIST OF LAST WEEK’S CENTRAL BANK DECISIONS:

• Israel holds rate on low inflation and moderate growth
• Angola holds key rate, raises absorption rate 25 bps
• Hungary cuts rate 22nd time, to mull next step in June
• Brazil maintains Selic rate at 11.0 pct after 9 raises
• Egypt holds rate, repeats limited upside inflation risks
• Trinidad holds rate, says inflationary pressures could rise
• Colombia raises rate another 25 bps to curb inflation
• Fiji maintains accommodative stance, objectives intact
• Albania cuts rate 25 bps to boost inflation

TABLE WITH LAST WEEK’S MONETARY POLICY DECISIONS:

This week (Week 23) seven central banks will decide on monetary policy, comprising the countries of Australia, India, Uganda, Canada, the United Kingdom, the euro area and Mexico. TABLE WITH THIS WEEK’S MONETARY POLICY DECISIONS:

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