Central Banks Split on Rate Moves Last Week

Monetary Policy Week in Review – Aug 26-30, 2013: Brazil, Indonesia raise rates, Hungary and Angola cut, 5 on hold

by Peter Nielsen, Central Bank News

Last week two major emerging market central banks, Brazil and Indonesia, raised their policy rates to stem the decline in their currencies and counter growing inflationary pressure while Hungary and Angola cut rates and five other central banks maintained rates.

Brazil and Indonesia raised rates by 50 basis points as international investors continued to shift funds toward advanced economies in anticipation of improving economic growth, illustrated by the U.S. Federal Reserve’s tapering of quantitative easing later this year, possibly already in September.

India and Turkey, the other two countries that are facing similar issues as Brazil and Indonesia, have so far maintained their policy rates but economists believe it is only a question of time before rates are raised and prospective returns are improved given the unrelenting pressure on their currencies.

Although Turkey raised its overnight lending rate in July and August by a total of 125 basis points, the main policy response of Turkey and India has been to use a combination of currency intervention, liquidity management and macro prudential measures to limit the slide in their currencies.

One question hovering over financial markets is whether the effect of the sudden reversal of years of currency inflows to emerging markets will trigger balance of payments’ crises in one of these countries, reawakening the fears and memories of 30 years of financial crises in emerging markets.

So far the answer is no.

• First, most of the exchange rates in major emerging markets are no longer fixed, which means the central banks don’t have to exhaust their reserves in a futile defense.

• Second, foreign currency reserves of emerging market central banks are vast in comparison with the late 1990s and cooperation among central banks in Asia is much deeper, illustrated by Indonesia’s currency swap agreement with the Bank of Japan last week.

• Third, government debt in Indonesia, India and Brazil is not that high and mainly denominated in local currency.

Through the first 35 weeks of this year, global policy rates have been raised a total of 17 times, or 5.1 percent of this year’s 331 policy decisions taken by the 90 central banks followed by Central Bank News, up from 4.7 percent the previous week.

Brazil and Indonesia have raised their policy rates seven times this year by a total of 300 basis points, accounting for all the rate rises by emerging market central banks. The other 10 rate rises this year have taken place in frontier markets and other markets.

The growing number of rate rises illustrates that global policy rates may have bottomed out this year. Nevertheless, Hungary and Angola’s rate cuts show that the global trend toward lower rates is still intact, with rate cuts accounting for 24.8 percent of this year’s policy decisions at the end of last week, unchanged from the previous week.

The other five central banks that maintained their rates this week included Colombia, Zambia, Moldova, Fiji and Israel. Noteworthy was Zambia’s reference to a slight increase in copper prices on the back of better Chinese imports in recent weeks.

LAST WEEK’S (WEEK 35) MONETARY POLICY DECISIONS:

This week (week 36) 11 central banks are scheduled to hold policy meetings, including those from Australia, Morocco, Kenya, Poland, Canada, Japan, Malaysia, the United Kingdom, the Eurosystem, Sweden and Mexico.
Events this week are also likely to be dominated by the Group of 20 leaders’ summit in St. Petersburg, Russia on Sept. 5 and 6.
Apart from the controversial issue of international intervention in Syria, leaders of the BRICS group – Brazil, Russia, India, China and South Africa – are reported to be ready to agree on some type of fund that can help its members with any short-term liquidity pressures.
From press reports, however, it is not clear whether this is the same institution that the five leaders agreed to launch at their March summit in South Africa. At that meeting, the BRIC leaders agreed to launch a New Development Bank with capital of $100 billion to help finance infrastructure.

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