Central Bank Guidance Evolves as Armenia Cuts, Georgia Raises Rates

Monetary Policy Week in Review – Feb 10-14, 2014

by Peter Nielsen, Central Bank News

The evolution of forward guidance was the main focus of global monetary policy last week as only two central banks changed their policy rates: Armenia, which cut its rate, and Georgia, which raised its rate.

Eight other central banks (Iceland, Mozambique, Indonesia, Sweden, Serbia, South Korea, Peru and Russia) maintained their rates so the Global Monetary Policy Rate (GMPR) – the average rate by the 90 central banks followed by Central Bank News – remained at 5.58 percent, up from 5.41 percent at the end of December.

Last week’s policy decisions came against a backdrop of improving sentiment in global financial markets, with Janet Yellen, the new chair of the U.S. Federal Reserve, and Sweden’s central bank essentially declaring that January’s volatility – which triggered concern that contagion would engulf emerging markets and drag down advanced economies – will have limited impact on the global economic recovery.

In her first public appearance since taking over from Ben Bernanke at the start of this month, Yellen said the recent volatility in global financial markets did “not pose a substantial risk to the U.S. economic outlook,” while Sweden’s Riksbank said the “recent financial market turbulence has had limited contagion effects and is not expected to prevent a recovery in the global economy.”

Although it’s too early to conclude that the prospects for 2014 are bright and rosy, both South Korea and Indonesia’s central banks were cautiously optimistic about the outlook despite the obvious risk that the Fed’s continued reduction in asset purchases will trigger further volatility as financial markets adjust to reduced global liquidity.

The forward guidance used by both the Fed and the Bank of England (BOE) to keep long-term interest rates low was the subject of much public debate last week, with some commentators criticizing the central banks for moving the goal posts, almost irritated that the two central banks were not planning to tighten monetary policy.

Both the Fed and BOE had set out certain unemployment rates as thresholds for reconsidering their policy stance and in both cases reality has now caught up with these thresholds.

Looking back, it was obvious that monetary policy decisions could not be put on auto pilot and in retrospect the Fed and BOE may have gone too far in their attempts to make complex and far-reaching decisions transparent and easy to grasp.

Through the first seven weeks of this year, six central banks have raised rates, or 9.3 percent of this year’s 64 policy decisions, marginally down from the previous week’s 9.4 percent. Seven central banks have cut rates, or 10.9 percent of this year’s policy decisions, down from 11.3 percent the previous week. Four of the six rate rises have come from the large emerging market central banks (Brazil, Turkey, India and South Africa) along with rate rises by Georgia and Ghana. The seven rate cuts have mainly come from central banks in frontier markets (two cuts by Romania and one by Jordan) and central banks in other markets (Armenia, Tajikistan and Uzbekistan) and just one by a central bank in an emerging market, namely Hungary.

LIST OF LAST WEEK’S CENTRAL BANK DECISIONS:

• Armenia cuts rate 25 bps on swift decline in inflation
• Iceland holds rate, warns of hikes soon, forecasts raised
• Rwanda to maintain accommodative policy – governor
• Georgia raises rate 25 bps on improving economy
• Mozambique holds rate, cuts monetary base target again
• South Korea holds rate, recovery continues, inflation low
• Sweden maintains rate, 2014 prospects still “good”
• Indonesia holds rate, global economy gaining momentum
• Serbia holds rate, stresses need for “cautious” policy
• Peru holds rate, cuts reserve requirements again
• Russia holds rate, warns of rises if inflation accelerates

OTHER STORIES LAST WEEK:

• Global Monetary Policy Rates – Jan 2014 – Average jumps to 5.56% as emerging markets respond to Fed’s tapering
• Yellen doesn’t see risk to US economy from volatility

TABLE WITH LAST WEEK’S MONETARY POLICY DECISIONS:

This week (Week 8) seven central banks will be deciding on monetary policy, including Sri Lanka, Japan, Namibia, Turkey, Chile, Hungary and Ghana.
In addition, central bank governors and finance ministers from the Group of 20 leading economic nations will meet in Sydney next weekend, Feb. 22 and 23. Australia is this year’s G20 president and host, culminating in a summit of G20 political leaders on Nov. 15 and 16 in Brisbane.

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