Emerging Market Rate Cuts

Monetary Policy Week in Review – Mar 9, 2013: Emerging Market Central Banks Cut, Major Banks Offer Nothing New

by Peter Nielsen, Central Bank News

Last week 14 central banks took policy decisions with two major emerging market central banks (Mexico and Poland) slashing rates to stimulate economic growth while two of the world’s major developed market central banks (the Bank of England and the European Central Bank) had nothing to offer to shore up confidence.

The decisions last week illuminate three major global issues: Firstly, the huge public policy challenges facing Europe and its shrinking economy; secondly, the ability of fast-growing emerging markets to cut rates while many advanced economies are running out of ammunition and ideas, and thirdly, the asynchroneous pace of global growth.

The contrast between the central banks of Mexico and Poland, on one hand, and the European Central Bank and the Bank of England, on the other hand, was stark. Mexico and Poland cut rates by a larger-than-expected 50 basis points while neither the ECB nor the BOE could muster up new initiatives. And in the case of the ECB, it essentially said it was up to politicians to get growth going.

In addition to Mexico and Poland, the Central Bank of West African States also cut  rates last week for a total of three rate cuts. Eleven central banks held rates steady(Australia, Uganda, Brazil, Canada, Japan, Indonesia, Malaysia, the BOE, the ECB, Peru and Sri Lanka).

Through the first 10 weeks of the year, 21 percent of 91 decisions taken by the 90 central banks followed by Central Bank News have lead to rate cuts, slightly up from the 20 percent seen after the first nine weeks, showing that global monetary policy rates are still trending downwards.

But the vast majority of policy decisions – 76 percent – favour unchanged rates, with many central banks, examplified last week by Australia, in a wait-and-see mode to gauge the impact of last year’s rate cuts and whether the global economy has enough momentum to overcome the drag from Europe’s recession and the fiscal cutbacks in the United States.

Central banks in emerging markets have accounted for almost half (nine) of this year’s 19 rate cuts while developed market central banks have not cut rates once.
This is largely explained by the fact that the world’s major central banks hit the zero bound four years ago when rates were slashed in response to the Global Financial Crises.  Since then, those banks have been using their balance sheets, or quantitative easing, to stimulate growth and hopes are high for new initiatives in coming months when new governors take up their jobs at the BOE and the BOJ.

Although Canada and Brazil held rates steady last week, they appear to be on diverging paths.

Canada, which spent most of last year warning about the need to raise rates, softened its tone further last week. The Bank of Canada initially switched tack in February, saying a tightening of policy was less imminent, and last week it moved further into neutral, saying the current stance was appropriate for the time being.

In Brazil the shift to a tighter policy stance seems to be under way to pull back inflation, which has been rising for eight months in a row, most recently in February.

After 10 consecutive rate cuts since August 2011, Banco Central do Brasil adopted a neutral stance last November – saying rates would remain steady for a prolonged period – but dropped this phrase last week, saying it was now monitoring conditions before deciding its next move.

And although Mexico cut its rate last week, it stressed that this did not herald the start of an easing cycle, signaling that it is still somewhat optimistic about growth prospects.

Next week (week 11) features nine scheduled central bank meetings, including two meetings that were rescheduled from last week to next week.

Mauritius rescheduled last week’s meeting to give the newly appointed policy committee members time to “take stock of the domestic economic and financial environment and to prepare for the meeting.”Among the eight members of the Bank of Mauritius’ Monetary Policy Committee are Prof. Jeffrey Frankel of Harvard University and Prof. Silvana Tenreyro of the London School of Economics.

Serbia rescheduled its executive board meeting “owing to obligations of Executive Board members.”

The other policy meetings next week include Mozambique, South Korea, New Zealand, the Philippines, Switzerland, Latvia and Norway.

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