ECB Mulls Answer to Strong Euro

Monetary Policy Week in Review Apr 7-11, 2014: 7 central banks hold rates

by Peter Nielsen, Central Bank News

Seven central banks lived up to expectations last week and held their policy rates steady as the focus of global monetary policy shifted to Washington D.C. and the spring meetings of the International Monetary Fund (IMF) and the Group of 20 finance ministers and central bank governors.

The G20 once again tiptoed around the issue of how individual central banks, such as the U.S. Federal Reserve, can limit some of the spillover effects of changes to its own policy on other countries.

Compared with the G20’s Sydney statement from February, when central banks were specifically mentioned, last week’s statement didn’t even mention central banks, a likely reflection of the fact that the Fed’s tapering of its asset purchases so far has been less disruptive than expected.

Here’s the wording from last week’s G20 statement:

“We are strengthening our macroeconomic cooperation by further deepening our understanding of each other’s policy frameworks and assessing the collective implications of our national policies across a range of possible outcomes. We will continue to provide clear and timely communication of our actions and be mindful of impacts on the global economy as policy settings are recalibrated.”

Here’s the wording from the Sydney statement:

“All our central banks maintain their commitment that monetary policy settings will continue to be carefully calibrated and clearly communicated, in the context of ongoing exchange of information and being mindful of impacts on the global economy.”

It was left to the European Central Bank (ECB) to provide some excitement, with two top ECB policymakers taking another step toward preparing financial markets for a policy response if the euro continues to strengthen.

Earlier this month the ECB stressed that its governing council was unanimous and ready to use unconventional monetary instruments in addition to rate cuts to ward off the threat of deflation.
On Friday ECB Executive Board Member Benoit Coeure told Bloomberg TV in Washington that “the stronger the euro the more need for monetary accommodation.”

As if to underscore that Coeure’s statement was not just a personal opinion but the consensus view of ECB policy makers, ECB President Mario Draghi the day after told a news conference:

“The strengthening of the exchange rate would require further monetary policy accommodation.”

In early Asian trading, the euro was quoted at $1.385, up almost 5 percent since the end of 2012 and 0.8 percent since the end of 2013 despite the more accommodative policy stance of the ECB compared with the Fed’s tighter stance.

Through the first 15 weeks of this year, policy rates have been raised 13 times, or 9.2 percent of this year’s 141 policy decisions by the 90 central banks followed by Central Bank News, up from 8.7 percent end-March but down from 10.1 percent end-February.

But global economic growth remains sluggish and inflation low, allowing some central banks to loosen their stance.

Policy rates have been cut 15 times so far this year, or 10.6 percent of this year’s policy decisions, down from 11 percent at the end of the previous week and 14 percent at the end of February.

LIST OF LAST WEEK’S CENTRAL BANK DECISIONS:

• BOJ maintains policy, demand to take hit from tax rise
• Indonesia holds rate, confident about 2014 inflation target
• Sweden holds rate, greater chance of near-term rate cut
• Poland on hold, repeats steady rate at least until end-Q3
• Korea holds rate, repeats good harvest keeps inflation low
• BOE maintains base rate, asset purchases, as expected
• Peru holds rate, H1 growth to be lower than expected

TABLE WITH LAST WEEK’S MONETARY POLICY DECISIONS:

This week (Week 16) six central banks will be deciding on monetary policy, including Singapore, Mozambique, Namibia, Canada, Serbia and Chile.

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