Monetary Policy Week in Review – Nov 11-15, 2013: Indonesia, Pakistan raise rates,Yellen signals easy policy

by Peter Nielsen, Central Bank News

Last week the central banks of Indonesia and Pakistan raised their rates to combat the twin scourge of inflation and currency depreciation as the global economy limps along and the presumptive new chair of the U.S. Federal Reserve signals that monetary policy will remain ultra-easy.

While the stock market cheered Janet Yellen’s dovish stance during her confirmation hearing to succeed Ben Bernanke, commentators again focused on the growing risk of asset bubbles and market distortion from five years of ultra-easy monetary policy in advanced economies.

Latvia’s 125 basis-point rate cut, ahead of joining the euro next year, was a fresh reminder of just how sluggish economic growth remains despite central banks’ valiant efforts to overcome the lingering effects of the global financial crises and make up for a lack of concerted political action.

Through the first 46 weeks of this year, central banks have cut their policy rates 104 times, or 23.27 percent of this year’s 447 monetary policy decisions taken by the 90 central banks followed by Central Bank News.

This is steady from the previous week’s 23.23 percent, but down from 25.3 percent after the first six months of the year.

In addition to Latvia, Armenia also cut its rate last week in response to easing inflationary pressures.

Meanwhile, four central banks maintained their policy rates last week. Sri Lanka, which has already cut rates by 100 basis points this year, saw a benign inflation environment; Mozambique, which has cut rates by 125 points this year, said inflation was in line with its objective; South Korea, which has cut by 25 points this year, is experiencing below-target inflation, while Belarus, which has cut by 650 points in 2013, continues to maintain high interest rates to attract capital and slowly push down inflation.

Indonesia raised its rate for the fifth time this year in an attempt to get inflation back down to the central bank’s target range along with its effort to limit imports and narrow the current account deficit, which has fueled investors’ concern and lead to capital outflows and thus currency depreciation.

Although Bank Indonesia’s senior deputy governor last week said the central bank was comfortable with the exchange rate, a further decline in the rupiah following the rate rise must cause concern, especially because expectations that the Fed will continue its asset purchases should have taken the heat of the rupiah.

Indonesia has been hit hard by the shift in global capital away from emerging markets and back toward advanced economies, with its rupiah down almost 16 percent this year against the U.S. dollar. In addition to the pass-through effect of a lower currency, Indonesia’s inflation rate has been pushed up by the government’s cut in fuel subsidies and the subsequent rise in petrol prices.

Pakistan, which raised its rate for the third time this year, also finds itself trying to tackle “resurging” inflationary pressures and saw its rupee drop further despite the rate rise. The rupee has depreciated some 9.4 percent against the U.S. dollar this year.

Policy rates have been raised 25 times out of this year’s 447 policy decisions, for a percentage of 5.6 percent, up from 5.2 percent the previous week and 4.7 percent after the first half. The rising percentage of rate rises by central banks in major emerging markets reflects the moves to limit inflationary pressures and shore up currencies, whose depreciation from capital outflows has fueled import prices and thus overall inflation. Half of this year’s 25 rate rises worldwide have been taken by central banks in emerging markets with Indonesia, Brazil and India raising rates by a total of 12 times.

LAST WEEK’S (WEEK 46) MONETARY POLICY DECISIONS:

This week (week 47) four central banks are scheduled to hold policy meetings, including Turkey, Nigeria, Japan and South Africa.