More Central Bank Cuts

Monetary Policy Week in Review – Nov 25-29, 2013: 4 central banks cut while BOE rolls back housing support

by Peter Nielsen, Central Bank News

Last week four central banks, among them Thailand, cut policy rates, maintaining the downward trend in global rates while Brazil raised its rate and the Bank of England (BOE) rolled back its support for the U.K. housing sector in the latest sign that the world’s sixth-largest economy is healing.

Financial markets initially saw the BOE’s move as a sign of monetary tightening but its governor, Mark Carney, quickly poured cold water on that view, saying the shift to neutral in the bank’s support of home lending would in fact allow its policy rate to stay low for longer.

The BOE’s decision “that additional stimulus for lending to households is no longer required” is significant in four ways:

First, it comes two weeks after the BOE upgraded its view of the UK economy in its November inflation report with the implication that interest rates may be raised in 2015 rather than 2016.

Second, it illustrates the new paradigm in central banking in which macro-prudential measures aimed at specific sectors, in this case housing, are used to maintain financial stability while the “really blunt tool” of policy rates (to quote Carney) is geared to the overall need of the economy.

Third, it is the latest example of how authorities worldwide are taking action to avoid another housing bubble, whether policy measures are maximum loan-to-value ratios, changes to the risk weights for home loans or the outright prohibition of certain types of housing loans, for example loans for second or third houses.

Fourth, it shows that central banks have to use forward guidance in conjunction with any change to policies, whether it’s macro-prudential measures or the size of quantitative easing, to ensure that financial markets don’t get ahead of themselves and price-in higher interest rates.

Meanwhile, last week 12 central banks decided on their monetary stance with four banks (Thailand, Angola, Hungary and Albania) cutting rates, Brazil raising its rate and seven maintaining rates (Israel, Ghana, Fiji, Tunisia, Zambia, Colombia and Trinidad & Tobago).

Thailand’s second rate cut of the year came as a surprise, partly because many emerging market central banks have been tightening policy to prevent capital outflows and currency instability in connection with the U.S. Federal Reserve’s likely tapering of asset purchases in the near future.

But the Bank of Thailand, which has now cut rates by 50 basis points this year, is becoming more concerned about weak growth with domestic political unrest now starting to deter tourists and thus dent growth further.

Hungary’s rate cut, its 16th in a row to 3.20 percent, was expected and the bank signaled further cuts, but there are signs that the easing cycle since August last year is coming to an end.

Not only did the central bank governor in July point to 3.0 or 3.5 percent as a low point for rates, but Hungary’s forint currency is now being hit by worries that rates may end up being cut too much, exposing the currency to a sell-off when the Fed starts reducing asset purchases.

In Brazil, the central bank raised its policy rate for the sixth time in a row to 10.0 percent, but omitted its usual reference to the policy decision helping ensure that the trend of lower inflation persists into next year.

Though this was hardly a clear and transparent sign of the central bank’s thinking about the direction of rates, financial markets and economists saw it as signal that the pace of rate rises were coming to an end, probably after another hike in January.

Through the first 48 weeks of this year, central banks have cut their policy rates 109 times, or 19.3 percent, of the 564 policy decisions taken by the 90 central banks followed by Central Bank News.

This is marginally up from 19.0 percent the previous week, but down from 25.3 percent after the first half, reflecting the recent rate rises by some of the major emerging market central banks.

Policy rates have been raised 26 times this year, or 4.6 percent of this year’s 564 policy decisions, slightly down from 4.7 percent after the first half of the year.

LAST WEEK’S (WEEK 48) MONETARY POLICY DECISIONS:

This week (week 49) nine central banks are scheduled to hold policy meetings, including Australia, Morocco, Canada, Poland, Norway, the United Kingdom, the European Central Bank, Egypt and Mexico.

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