Fed says QE to end in November, Portugal rattles markets

Monetary Policy Week in Review: 07-11 July 2014

by Peter Nielsen, Central Bank News

Global monetary policy last week was dominated by the Federal Reserve’s message that the post-crises era of quantitative easing will end in November when it buys a final batch of U.S. Treasuries and housing market debt, shutting off one of the major spigots of global liquidity. Minutes of the June 17-18 meeting by the Federal Open Market Committee (FOMC), the Fed’s policy making body, showed that “participants generally agreed” that the Fed’s asset purchase program would be completed with the purchase of $15 billion of assets following the FOMC meeting on Oct. 29 if the economy improves as expected.

News of the Fed’s decision to wrap up its third program of quantitative easing, known as QE3, was greeted with a “so what” shrug by financial markets, a welcome contrast to May 2013 when news that the Fed could “take a step down” in its asset purchases in the next few meetings rattled markets and triggered a major reversal of global capital flows away from emerging markets. The lack of market volatility in response to the FOMC’s message illustrated the benefit of transparent and consistent communication.

From now on, the focus is squarely on when the Fed will start raising rates – in the minutes described as “the liftoff of the federal funds rate” – with every new release of unemployment and inflation rates likely to spark feverish speculation and market volatility.

The minutes showed how the FOMC is going to great lengths to ensure that it keeps up this track record of transparency, with policy makers debating the nitty-gritty of monetary policy post-QE. This includes how the Fed should communicate while it still has a very large balance sheet and how its tools – interest on excess reserves (IOER) and overnight repurchase agreements (ON RRP) – will work in conjunction with the tried and true federal funds rate to control short-term rates.

But while the FOMC minutes hardly caused a stir, European and then global markets were rattled by trouble at Portugal’s biggest listed bank, Banco Espirito Santo, and its controlling shareholder.

Although the Bank of Portugal said it it did not believe Banco Espirito Santo was a risk, the episode was an uncomfortable reminder to investors of the depth of Europe’s financial troubles and how lengthy and messy its resolution is likely to be.

It was only last week that Hans-Werner Sinn, the respected head of Germany’s Ifo economic institute, called on policy makers to organize partial debt relief to southern European countries where households, companies, banks and states remain over-indebted.

Last week 11 central banks decided on monetary policy with Malaysia as expected raising its rate as it starts normalizing its policy.

In addition to Malaysia, Ghana also continued its monetary tightening while Peru surprisedmarkets by cutting its rate to counter economic weakness.

Through the first 28 weeks of this year, the 90 central banks followed by Central Bank News have cut their policy rates 34 times compared with 25 rate rises, illustrating how rates are still coming down though at a decreasing rate compared with 2013.

Of this year’s 265 policy decisions by the 90 central banks, 12.8 percent have favored rate cuts, up from 10.6 percent at the end of May and 11.9 percent at the end of the first quarter.

The global monetary policy rate (GMPR), the average nominal rate of the 90 central banks, was steady at 5.53 percent at the end of last week from the end of June, but down from 5.56 percent at the end of May and 5.57 percent end-April and unchanged from 5.53 percent at the end of the first quarter. But it was up from 5.41 percent end-2013. LIST OF LAST WEEK’S CENTRAL BANK DECISIONS:

• Kenya holds rate, inflation remains within target range
• Ghana raises rate 100 bps to contain inflation pressure
• Korea maintains rate, to check if Sewol dents demand
• Indonesia holds rate as inflation continues to ease
• Malaysia raises rate 25 bps as inflation above average
• BOE maintains bank rate, stock of assets, as expected
• Serbia holds rate steady, mindful of global risks
• Peru cuts rate 25 bps, not beginning of series of cuts
• Mexico maintains rate, inflation seen moving to target
• Mozambique maintains rate as inflation eases, FX stable

TABLE WITH LAST WEEK’S MONETARY POLICY DECISIONS:

This week (Week 29) nine central banks will decide on monetary policy, comprising the countries of Sri Lanka, Japan, Chile, Canada, Brazil, Turkey, Egypt, South Africa and Pakistan. TABLE WITH THIS WEEK’S MONETARY POLICY DECISIONS:

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