Central Banks End Year on Quiet Note

Monetary Policy Week in Review – Dec 23-27, 2013: Tunisia raises rate, Armenia cuts, year ends on quiet note

by Peter Nielsen, Central Bank News

The final week of 2013 provided few fireworks in global monetary policy with financial markets largely in an upbeat mood over the prospects for 2014 – already dubbed ‘Year of the Taper’ – following the previous week’s decision by the U.S. Federal Reserve to start winding down its asset purchases beginning in January in a predictable and calm manner.

Six central banks took policy decisions last week, with Tunisia raising its rates, Armenia cutting its rates and the other four (Angola, Israel, Taiwan and Zambia) keeping rates on hold.
The general message from these six central banks was that global economic growth is slowly improving and inflation is largely in check, except in a few hot spots, such as Tunisia and Zambia.

Tunisia’s central bank, which raised its policy rate for the second time this year, embodies the struggle that many emerging and frontier market central banks have been facing most of this year. International investors have withdrawn funds in favor of advanced economies, leading to depreciating currencies, upward pressure on current account deficits and inflation.

Credible and resolute political leadership is the answer to such troubles, and in the case of Tunisia there are signs that three years of unrest following the political uprisings that gave birth to the Arab Spring may be easing as a caretaker government takes over in early January in the run-up to an election and new constitution.

Through the 52 weeks of this year, the 90 central banks followed by Central Bank News cut their policy rates 117 times, or 23.2 percent, of this year’s 505 policy decisions, steady from the previous week but down from 25.3 percent mid-year.

Nine percent of this year’s rate cuts were carried out by developed market central banks, 18 percent by frontier market central banks, 32 percent by emerging market central banks and 41 percent by central banks in other countries.

There were 27 rate rises this year, or 5.3 percent of this year’s 505 policy decisions, up from 4.7 percent after the first half of this year, reflecting this year’s rate rises by Brazil, Indonesia, India and a few other countries, such as Pakistan, Ghana, Gambia and Zambia.

Of this year’s rate rises, 13, or 48 percent, came from emerging market central banks compared with only one rate rise from developed market central banks. Denmark was the lone rate riser among developed market central banks but that move reflected easing upward pressure on its currency rather than a strong economy as investors returned to euro zone assets, allowing the Danish central bank to normalize its policy that is aimed at holding the krone in a narrow band to the euro.

LIST OF LAST WEEK’S (WEEK 52) STORIES:

• Israel holds rate, 2014 growth seen rising moderately
• Angola holds rate, cites trend in economic indicator
• Armenia cuts rate 25 bps, sees further rate cuts in 2014
• Taiwan holds rate, sees higher 2014 growth, inflation
• Tunisia raises rate 50 bps on inflation, FX, C/A concern
• Zambia holds rate steady, sees inflationary pressures

TABLE WITH LAST WEEK’S MONETARY POLICY DECISIONS:

This week (week 1) is very quiet on the monetary policy front, with only Sri Lanka’s central bank on Jan. 2 presenting its “Road Map,” a comprehensive overview of its policy direction and work plan for the coming period. This is the eight consecutive year that the bank has presented its Road Map.