August 18th, 2014
by Peter Nielsen, Central Bank News
Last week in global monetary policy three central banks (South Korea, Chile and Armenia) cut their key rates to shore up economic growth amidst deep concern over geopolitical stability, a theme that is now reverberating through financial markets.
Four of the nine central banks that issued policy statements last week specifically referred to geopolitical developments with the National Bank of Georgia again noting that domestic and external demand had already been impacted and this would further delay what it described as a necessary exit from accommodative monetary policy.
The impact of international tensions in Ukraine and the Mideast on monetary policy was also referred to by Mark Carney, Bank of England (BOE) governor, in his press conference last Wednesday, though at this point it has not had any affect on U.K. policy.
"I would say it's early days, but it's something we obviously have to monitor and if it becomes an important determinant obviously we'll talk more directly to it," Carney said, adding that geopolitical events can evolve rapidly.
In addition to Georgia, South Korea, Armenia and Uganda's central banks also referred to geopolitical uncertainties in their policy statements.
The Bank of Uganda said:
"Financial and commodity markets also remain vulnerable to instability as geopolitical risks remain elevated."
The other recurring theme among central banks was the coming shift in monetary policy in the United States and the U.K., with emerging market central banks continuing to position themselves to avoid a repeat of last summer's "taper tantrum" when global capital reversed course and started flowing out of emerging markets and back to advanced economies.
Bank Indonesia (BI) said:
"Looking ahead, there are a number of global risks that we need to be wary of, among other things, the normalization of Fed policy and the Bank of England, and the risk of spillovers and spillback from the weakening economy of emerging markets."
Indonesia, along with Turkey, India and South Africa, were among those countries that were most seriously affected by the outflow of capital, with their central banks forced to raise interest rates to project their currencies and rein in accelerating inflation.
South Korea was less affected by the last year's shift in capital flows, but is still aware of the potential disruptions to global financial markets and economic growth from geopolitical tensions and the coming tightening in U.S. monetary policy.
The Bank of Korea (BOK) said last week:
"The Committee forecasts that the global economy will sustain its modest recovery going forward, centering around advanced economies, but judges that the possibility exists of its being affected by the changes in global financial market conditions stemming from the shift in the US Federal Reserve's monetary policy stance, by the weakening of economic growth in some emerging market countries and by geopolitical risks."
Boosted by last week's three rate cuts, the 90 central banks followed by Central Bank News have now cut their policy rates 44 times through the first 33 weeks of this year. Fourteen percent of this year's 312 policy decisions have favored rate cuts, up from 12 percent at the end of the first half and 12 percent at the end of the first quarter.
But the trend toward higher global rates continues to simmer under the surface, with policy rates so far this year raised 33 times, or 10.6 percent of the decisions taken, up from 9.3 percent at the end of June and 8.7 percent at the end of March. LIST OF LAST WEEK'S CENTRAL BANK DECISIONS:
- Armenia cuts rate 25 bps as inflation plunges
- Mozambique maintains rate on positive inflation outlook
- Georgia maintains rate, exit from easy policy to take time
- Korea cuts rate 25 bps on sluggish demand, investment
- Indonesia holds rate steady as C/A deficit widens
- Uganda maintains rate and economic forecasts
- Chile cuts rate by 25 bps, will consider further cuts
- Sri Lanka maintains rates on benign inflation outlook
- Botswana maintains rate, inflation seen in line with target
TABLE WITH LAST WEEK'S MONETARY POLICY DECISIONS:
|COUNTRY||MSCI||NEW RATE||OLD RATE||1 YEAR AGO|
This week (Week 34) only two central banks are scheduled to decide on monetary policy: Namibia and Iceland.
TABLE WITH THIS WEEK'S MONETARY POLICY DECISIONS:
|COUNTRY||MSCI||DATE||CURRENT RATE||1 YEAR AGO|