Trinidad Joins Central Banks Adjusting Policy Pre-Fed Rise

Monetary Policy Week in Review 22-16 September 2014

by Peter Nielsen, Central Bank News

Trinidad and Tobago’s central bank became the latest to adjust its policy rate last week ahead of the looming change in U.S. monetary policy, raising its repo rate to prevent capital from seeking higher yields abroad, a move that would put pressure on its exchange rate and spark inflation.

The growing prospect of a hike in U.S. rates by mid-2015 was also the main feature of global financial markets last week, with volatility jumping, stock markets gyrating and the U.S. dollar extending its gains on the back of an upward revision of U.S. second quarter growth figures.

Major emerging markets, such as Turkey, India and South Africa, were hit by a change in the flow of global liquidity last summer and this January, and Trinidad’s move this week serves as another reminder of how the Fed’s policy stance reaches into every single crevice of global financial markets. The Central Bank of Trinidad and Tobago raised its benchmark repo rate by 25 basis points to 3.0 percent, its first change in rates since September 2012, “to pre-empt a potential rise in inflationary pressures and to mitigate higher portfolio outflows.”

The central bank said the Fed’s statement after the Sept. 17 meeting of its Federal Open Market Committee (FOMC) had altered market expectations about the start to higher U.S. rates as its communication suggested a change in policy stance would come sooner than anticipated, with a gradual increase in rates around mid-2015.

This had resulted in an immediate rise in U.S. Treasury yields that made U.S. dollar assets more attractive relative to Trinidad and Tobago assets.

Trinidad’s central bank said:

“It has become necessary to enhance the appeal of TT dollar assets which have lower returns in relation to U.S. dollar assets, as returns on the latter will be bolstered the Fed’s expected monetary policy actions are realized.”

On Sept. 17 the FOMC had confirmed that it expected to conclude its asset purchase program at its next meeting in October and repeated its guidance that rates would be maintained for “a considerable time” after the asset purchase program ends.

However, the statement also showed an increase in the number of FOMC participants that expect the first rise in the fed funds rate in 2015 to 14 from 12 members in June. In addition, FOMC members’ median estimate for the fed funds rate – illustrated by the now infamous but slightly confusing dot plot chart – rose to 1.375 percent end-2015 from June’s estimate of 1.125 percent. In addition to Trinidad and Tobago, Morocco’s central bank also changed its rate last week, cutting it by 25 basis points for the first time since March 2012, to boost growth while domestic inflation – just as global inflation – remains low, reflecting the recent decline in global commodity prices.

But the other 12 central banks that deliberated monetary policy last week retained their policy rates, with several pointing to the uneven pace of global economic growth, the escalation of geopolitical conflicts and the uncertainty surrounding the timing of Fed interest rate rises.

Through the first 39 weeks of this year, the 90 central banks followed by Central Bank News have cut their policy rates 49 times, or 13.5 percent of all policy decisions, up from 12 percent at the end of the first half and 12 percent at the end of the first quarter.

Meanwhile, rates have been raised 37 times, or 10.2 percent of all policy decisions, up from 9.3 percent at the end of June and 8.7 percent at the end of March. The Global Monetary Policy Rate (GMPR), the average nominal rate by 90 central banks, remained at 5.54 percent, up from 5.53 percent at the end of June and 5.53 percent end-March. LIST OF LAST WEEK’S CENTRAL BANK DECISIONS:

• Israel holds rate, 2014 growth seen at 2.3% vs 2.9%
• Hungary holds rate, sees easy stance for extended period
• Morocco cuts rate 25 bps with inflation on target
• Albania maintains rate at 2.50 percent
• Georgia holds rate, tightening to depend on inflation
• Turkey holds rates, repeats will maintain tight stance
• Czech maintains rate at 0.05%, FX commitment
• Fiji holds rates, can remain accommodative for now
• Taiwan holds rate on mild inflation and output gap
• Botswana holds rate, inflation in line with objective
• Colombia holds rate on good demand, global uncertainty
• Trinidad raises rate 25 bps to curb inflation, outflows

TABLE WITH LAST WEEK’S MONETARY POLICY DECISIONS:

This week (Week 40) five central banks are scheduled to decide on monetary policy: Angola, India, Romania, Iceland and the European Central Bank (ECB).

TABLE WITH THIS WEEK’S MONETARY POLICY DECISIONS:

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