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Nigeria holds rate, easing would hit naira, boost inflation

November 22, 2017 by CentralBankNews   Comments (0)

      Nigeria's central bank left its monetary policy rate (MPR) at 14.0 percent, as expected, saying a loosening of policy now would boost growth and demand but also aggravate the upward trend in consumer prices and generate pressure on the exchange rate, ultimately leading to a deterioration in the current account balance though higher imports.
       The Central Bank of Nigeria (CBN), which has maintained its rate since raising it by 200 basis points in July 2016, added that its monetary policy committee voted by 8-1 to keep the rate steady, with one member voting to cut the rate by 100 basis points.
       At its previous meeting in September, 6 members of the policy committee voted to retain the rate while one member also voted to lower it.
       The decision to maintain the rate was expected and comes after the central bank's governor, Godwin Emefiele, earlier this month said he was optimistic there would be an easing of  monetary policy if the pace of disinflation is adequate and inflation reaches predicted levels.
       Nigeria's inflation rate fell for the ninth consecutive month to 15.9 percent in October from 15.98 percent in September, helped by a relatively stable naira and a contraction in money supply. This year inflation hit a high of 18.72 percent in January and has been falling ever since.
       During its two-day meeting, the bank's monetary committee also discussed raising the key rate as this would strengthen the impact of its policy on inflation, along with capital inflows and exchange rate stability, but it would also dampen the positive outlook for growth and financial stability.
        The argument to maintain the rate won the day, with the committee saying economic variables have continued to evolve in line with its current stance and should be allowed to fully manifest but economic output and inflation in particular "required effective close monitoring in order to gain clarity on the medium optimal path of monetary policy."
        After suffering the worst economic slump in 25 years in 2016, Nigeria's economy is starting to recover, with inflation trending downward and the exchange rate of the naira stabilizing.
        Gross Domestic Product grew by an annual rate of 1.4 percent in the second quarter, up from 0.72 percent in the first quarter as the country pulls out a 1.6 percent contraction in 2016.
        The International Monetary Fund has forecast 2017 growth of 0.8 percent and 1.9 percent next year as the output of oil, Nigeria's largest export, rises and results in more available foreign currency, which then allows factories and other businesses import goods.
        Nigeria has been suffering from a shortage of U.S. dollars since the fall in crude oil prices in 2014 but has slowly been easing some of the restrictions and capital controls that were imposed in 2015 to shore up the naira's exchange rate.
      The central bank operates a series of exchange rates in addition to the official rate. Last week the central bank sold U.S. dollars at 306 naira but for investors the naira is still quoted around 360 per dollar.

       The Central Bank of Nigeria issued the following statement:

The Monetary Policy Committee met on the 20th and 21st of November, 2017 against the backdrop of a relatively optimistic global economic outlook. The Committee reviewed key developments in the global and domestic economies during the first ten months of 2017 and assessed the risks to price and financial stability in the short- to-medium term as well as outlook for the first half of 2018.
Nine (9) members of the MPC were present at the meeting.

External Developments
Global output is projected to improve to 3.6 per cent in 2017 from 3.2 per cent in 2016. The revised growth forecast reflects the uptick in global economic activity, strengthened by the recovery in oil and other commodity prices and leading to improved aggregate demand. Growth in the advanced economies is projected to improve to 2.2 per cent in 2017 from 1.7 per cent in 2016. Similarly, emerging markets and developing economies are forecast to grow at 4.6 per cent in 2017 up from 4.3 per cent in 2016. The MPC, however, noted some risks to the outlook for global growth to include: continued tension in the Korean Peninsula, complexities arising from the BREXIT negotiations and financial market uncertainties due to monetary policy normalization in the US.
The Committee noted that the pace of increase in inflation in the advanced economies, with the exception of the UK, is expected to be considerably slow towards the end of 2017. In the emerging market economies, inflationary pressures have abated as key economies exit recession and their currencies stabilize. Inflation is projected at 1.7 and 4.2 per cent in 2017 in the advanced and developing economies, respectively. The Committee observed that the outlook for global monetary policy remains largely accommodative, in support of economic recovery and growth.

Domestic Output Developments

Data from the National Bureau of Statistics (NBS) indicate that real Gross Domestic Product (GDP) grew by 1.40 per cent in the third quarter of 2017, up from 0.72 per cent, and contraction of 0.91 per cent in the second and first quarter of 2017, respectively. The major drivers of real GDP growth were agriculture (0.88%) and industry (1.83%). Some subsectors contracted, including: construction (0.01%), trade (0.29%) and services (1.02%). Overall, non-oil real GDP contracted by 0.76 per cent in Q3 2017, giving credence to the argument that more work is required to consolidate the recovery process; by putting in place policies that will boost growth through the non-oil sector.

The Committee also noted the continuous positive outlook based on the Manufacturing Purchasing Managers Index (PMI), which stood at 55.0 index points in October 2017, indicating expansion in the manufacturing sector for the seventh consecutive month. Eleven of the sixteen sub-sectors reported growth in the review period. Also, the composite PMI for the non-manufacturing sector stood at 55.3 index points in October 2017, indicating growth for the sixth consecutive month. The Committee hopes that, while the economic recovery appears to remain fragile, a tenacious implementation of the 2017 budget and quick passage of the 2018 budget would boost aggregate demand and confidence in the economy.

Developments in Money and Prices

The Committee noted that money supply (M2) contracted by 5.54 per cent in October 2017 (annualised), in contrast to the provisional growth benchmark of 10.29 per cent for 2017. The development in M2 is largely due to the contraction of 37.50 per cent in other assets net (OAN). Similarly, M1 contracted by 7.79 per cent (annualised to -9.35 per cent). Net domestic credit (NDC) expanded by 1.18 per cent, annualized to 1.42 per cent, driven primarily by net credit to government, which also expanded by 7.60 per cent against the programmed growth of 33.12 per cent. Credit to the private sector, however, contracted by 0.24 per cent in October 2017, compared with the provisional benchmark of 14.88 per cent. The MPC also noted the structural constraints in the transmission of credit to the real sector of the economy as well as the rising unemployment level. The Committee urged the Management of the Bank to continue to encourage the deposit money banks to accelerate the rate of credit growth to the real sector of the economy.

Inflationary pressures in the economy continued to moderate with headline inflation (year-on-year) receding for the ninth consecutive month to 15.91 per cent in October 2017 from 15.98 per cent in September 2017. Food inflation fell marginally to 20.31 per cent from 20.32 per cent in September, while core inflation increased slightly to 12.14 per cent from 12.12 per cent during the same period. These developments were attributable to the contraction in money supply, favourable but dwindling base effects, and the relatively stable naira exchange rate. In spite of the marginal decline in food inflation in October, the Committee noted that the rate remained high, traceable to cross border sales, distribution bottlenecks, high prices of farm inputs and supply shortages.

Money market interest rates oscillated in tandem with the level of liquidity in the banking system as the average inter-bank call rate, which opened at 12.00 per cent on October 3, 2017, closed at 5.38 per cent on November 16, 2017. The OBB rates opened at 10.41 per cent and closed lower at 6.02 per cent in the same period. However, the average inter-bank call and OBB rates for the period stood at 10.94 and 10.15 per cent, respectively. The development in net liquidity positions and flows reflected the effects of Federation Account payments to states and local governments; remittances by the Nigerian Customs, Federal Inland Revenue Services; OMO sales; foreign exchange interventions and maturing CBN Bills.

The Committee noted the continuing improvement in the level of external reserves and the equities segment of the capital market. External reserves grew to US$34.9 billion at the close of business on November 16, 2017. Similarly, the All-Share Index (ASI) rose by 3.38 per cent from 35,504.62 on August 31, 2017 to 36,703.58 on November 17, 2017. Market Capitalization (MC) improved by 4.35 per cent to N12.77 trillion from N12.24 trillion during the same period. Relative to end-December 2016, capital market indices rose by 36.57 and 38.10 per cent, respectively, indicating rising investor confidence, due to improvements in foreign exchange supply.

Total foreign exchange inflow through the central bank declined by 6.61 per cent in October 2017, compared with the previous month and attributable to the decline in crude oil and gas receipts as well as revenues from petroleum profit tax (PPT) and royalty payments. Total outflows, however, increased by 18.77 per cent during the same period, as a result of interbank sales, direct payments and JVC calls.

The Committee noted the gradual convergence between the rates at the bureau-de-change (BDC) and the Nigeria Autonomous Foreign Exchange (NAFEX) market segments, as well as the stability of the exchange rate at the inter-bank segments of the foreign exchange market during the review period. Similarly, the Committee viewed with satisfaction, the growing patronage at the Investors’ and Exporters’ (I&E) window of the foreign exchange market and attributed the development to increased confidence by foreign investors and the preference of Nigerian investors’ and exporters’ for the window compared with all other windows. The MPC noted that the I&E window had increased liquidity and boosted confidence in the market with over US$18.70 billion in transactions since its introduction in April 2017.

2.0. Overall Outlook and Risks

Forecasts of key macroeconomic variables indicate a positive outlook for the economy up to Q1 2018. This is predicated on continued implementation of the 2017 budget into early 2018, anticipated improvements in government revenue from the implementation of the Voluntary Asset and Income Declaration Scheme (VAIDS) as well as favourable crude oil prices. The development finance initiatives by the CBN in the real sector, particularly in agriculture, are expected to continue to yield positive results in terms of output expansion and job creation. Focusing on the downside risks to the outlook, the Committee noted the low fiscal buffers and weak aggregate domestic demand. On the external front, widening global imbalances, and rising geo-political tensions were some of the crucial risks identified.

3.0. The Considerations of the Committee

The Committee noted with satisfaction the second consecutive quarterly growth in real GDP following five quarters of contraction. In addition, Members welcomed the relative stability in the exchange rate, particularly the narrowing premia and the very slow deceleration in consumer price inflation, largely attributable to base effects. Overall, the economy has begun to show strong signs of recovery as public investment has picked up with increased housing construction at the Federal and state levels, as well as shipping activities at the ports. The Committee was, however, of the view that policy makers must not relent in their aggressive policy initiatives aimed at continuing the positive growth trajectory. The Committee was also concerned about potential adverse external developments and the cautious approach to lending and financial intermediation by domestic deposit money banks.

The Committee similarly evaluated other concerns in the domestic economy and the opportunities for strengthening output recovery, noting that some highly critical subsectors were yet to resume growth. The Committee noted the significant contribution of food prices to headline inflation and observed that the benefit of base effect on overall headline inflation had substantially dwindled. Members, however, expressed confidence that the tight stance of monetary policy and the stability in the exchange rate of the naira should continue to positively weigh in on price developments. The Committee reaffirmed its commitment to maintaining price stability, which is crucial to sustainable economic growth and development.
The Committee welcomed the review of the Economic Recovery and Growth Plan (ERGP), in an effort to realise the objectives of the plan. In the same vein, the Committee urges a quick passage of the 2018 Appropriation Bill by the National Assembly, so as to keep fiscal policy on track and deliver the urgently needed reliefs in terms of employment and growth of the economy.

On financial stability, the Committee noted the concentration of non-performing loans in a few sectors but observed that the overall condition and outlook for the banking system was stable as deposit money banks’ balance sheets remained strong. This assessment is strengthened by developments in the national accounts and the expectations that the affected sectors are returning to growth. Nonetheless, the Committee urged further strengthening of supervisory oversight and deployment of early warning systems in order to promptly identify vulnerabilities and proactively manage emerging risks in the banking system. The Committee further observed that government was increasing debt, both domestically and externally, thus crowding out the private sector.

4.0. The Committee’s Decisions
In arriving at its decision, the Committee appraised potential policy options in terms of the balance of risks. The Committee also took note of the gains made so far as a result of its earlier decisions; including the stability in the foreign exchange market and the moderate reduction in inflation and thus extensively deliberated the options regarding whether to hold , tighten or ease the policy stance.

While tightening would strengthen the impact of monetary policy on inflation with complementary effects on capital inflows and exchange rate stability, it nevertheless could also potentially dampen the positive outlook for growth and financial stability. On the other hand, whereas loosening would strengthen the outlook for growth by stimulating domestic aggregate demand through reduced cost of borrowing, it could aggravate upward trend in consumer prices and generate exchange rate pressures. The Committee also feels that loosening would worsen the current account balance through increased importation. On the argument to hold, the Committee believes that key variables have continued to evolve in line with the current stance of macroeconomic policy and should be allowed to fully manifest. Members noted that the developments in output and inflation in particular required effective close monitoring in order to gain clarity on the medium term optimal path of monetary policy.

In consideration of the foregoing, the Committee decided by a vote of 8 to 1 to retain the Monetary Policy Rate (MPR) at 14.0 per cent alongside all other policy parameters. One member voted to reduce the MPR by 100 basis points.
Consequently, the MPC voted to:
  1. (i)  Retain the MPR at 14.0 per cent;
  2. (ii)  Retain the CRR at 22.5 per cent;
  3. (iii)  Retain the Liquidity Ratio at 30.0 per cent; and
  4. (iv)  Retain the Asymmetric corridor at +200 and -500 basis points

around the MPR."


Hungary holds rate, launches 2 tools to hold down yields

November 21, 2017 by CentralBankNews   Comments (0)

       Hungary's central bank left its key interest rates unchanged but went against the general trend in European monetary policy by launching two new unconventional instruments aimed at ensuring "the persistence of loose monetary conditions over a prolonged period."
       The National Bank of Hungary (NBH), which has maintained its base rate at 0.90 percent since May 2016, will introduce "unconditional interest rate swap (IRS) facilities" with 5 and 10-year maturities from January 2018, with a first quarter allocation of 300 billion forints, along with a program to purchase mortgage bonds with maturities of 3 years of more.
      "Both programs will also contribute to an increase in the share of loans with long periods of interest rate fixation," the central bank said, adding it will decide on operational details next month.
      The NBH was expected to launch new policy instruments today after its monetary council last month decided it was necessary to loosen monetary conditions further and push down long-term yields via unconventional instruments after the September inflation report concluded that downside risks to inflation had risen.
       After the central bank once again pushed back the target for meeting its inflation objective, the NBH in September also cut its overnight deposit rate by 10 basis points to minus 0.15 percent and lowered the upper limit on the stock of 3-month central bank deposits to 75 billion forint from the end of 2017 from 300 billion at the end of of the third quarter of 2017.
       The NBH expects to reach its inflation target of 3.0 percent, plus/minus 1 percentage point,  by mid-2019 instead of early 2019 and confirmed this forecast today.
      Hungary's headline inflation rate eased to 2.2 percent in October from 2.5 percent in September and the central bank expects inflation to average 2.4 percent this year, up from 0.4 percent in 2016, as inflation declines to the bottom of its tolerance band by the end of this year.
       Core inflation is expected to decline in the second half of next year as the temporary effects from changes in tobacco and dairy products fade. Moderate imported inflation, low inflation expectations and planned cuts in Value-Added-Tax next year will also slow any rise in domestic prices,.
       In September the central bank also cut its 2018 inflation forecast to 2.5 percent from 2.8 percent and the 2019 forecast to 2.9 percent from 3.0 percent.
       Hungary's economy expanded by 3.6 percent year-on-year in the third quarter of this year, up from 3.3 percent in the second quarter. The central bank confirmed its forecast for economic growth this year of 3.6 percent, adding growth will be between 3 and 4 percent in coming years.
       In September the central bank forecast growth of 3.7 percent in 2018 and 3.2 percent in 2019, up from 2.0 percent growth in 2016.
       Hungary's forint has been weakening in recent months after strengthening in the second quarter of this year. The forint was trading at 313.3 to the euro today, down 1.1 percent this year.

      The National Bank of Hungary issued the following statement:

"At its meeting on 21 November 2017, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 22 November 2017:
Central bank interest rate
Previous interest rate (percent)
Change (basis points)
New interest rate (percent)
Central bank base rate
No change
Overnight deposit rate
No change
Overnight collateralised lending rate
No change
One-week collateralised lending rate
No change
In the Council’s assessment, Hungarian economic growth picks up over the forecast horizon. Some degree of unused capacity has remained in the economy, but this is likely to be gradually absorbed as output grows dynamically. The inflation target is expected to be achieved in a sustainable manner by the middle of 2019.
In October 2017, inflation decreased to 2.2 percent and core inflation to 2.7 percent. Both headline and core inflation came in somewhat below the Bank’s and the market’s expectations, with the moderate dynamics of services and tradables prices accounting for most of the difference. The Bank’s measures of underlying inflation declined compared with the previous month and continued to be significantly below the level of core inflation. The expansion in domestic employment, the tight labour market as well as increases in the minimum wage and the guaranteed minimum wage have led to a general, dynamic rise in whole-economy wages. The upward effect of this on costs is being offset by the reduction in employers’ social contributions and in the corporate income tax rate early this year. In line with the Bank’s expectations, there has still not yet been any significant upward pressure on inflation from wages. Oil prices have risen in recent months. Global underlying inflation continues to be moderate. External inflation, particularly in the euro area, is likely to remain low for a prolonged period.
Following a temporary rise, the consumer price index is likely to decline again to the bottom of the tolerance band by the end of 2017. Core inflation is expected to decrease in the second half of next year as the temporary effects related to changes in tobacco and dairy product prices fade. Looking ahead, the Bank’s measures of underlying inflation are expected to be around 2 percent. Moderate imported inflation and historically low inflation expectations as well as the VAT rate cuts, announced for next year, have been slowing the rise in domestic prices. In the September projection, the inflation target can be achieved sustainably by the middle of 2019.
The Hungarian economy grew by 3.6 percent in the third quarter of 2017. In September, industrial production increased relative to a year earlier at a rate similar to those in previous months, the volume of retail sales picked up. Labour demand remained strong: employment was at historically high levels in the third quarter of 2017. The unemployment rate continued to fall. The general increase in domestic demand will continue to play a central role in economic growth. Robust growth in construction and the expansion in the performance of the service sector are likely to continue in the coming months. Hungary’s current account surplus is expected to fall over the forecast horizon in response to rising domestic demand. Economic growth this year will also be supported by the fiscal budget and the stimulating effects on investment of EU funding. The Monetary Council expects annual economic growth of 3.6 percent in 2017 and stable growth of between 3-4 percent over the coming years. The Bank’s and the Government’s stimulating measures contribute substantially to economic growth.
Sentiment in international financial markets has, on the whole, been positive in the period since the Council’s previous interest rate decision. Monetary policy decisions by the world’s leading central banks and the latest macroeconomic data were the main factors influencing investors’ appetite for risk. The balance sheet reduction programme of the Fed has started in October 2017; however, market prices suggest no major change in interest rate expectations. In October, the European Central Bank announced that it would slow the pace of its asset purchases from January 2018. Nevertheless, persistently loose monetary conditions are expected in the period ahead. Market participants anticipate the ECB’s first interest rate hike to occur even later than previously thought, in the middle of 2019. Investors’ perceptions about the Central and Eastern European region continued to be positive. Due to the different inflation paths expected in the countries of the region and the different characteristics of inflation targeting regimes, market pricing suggests that the timing of central bank actions will differ.
In the Council’s assessment, the gradual limitation on the stock of three-month deposits has fulfilled its role and the HUF 75 billion year-end upper limit on the stock will not be reduced further. Therefore, the importance of the stock and maturity structure of central bank swap instruments providing forint liquidity will increase. In the future, the Council will decide on the amount of liquidity crowded out on a regular frequency and will adjust the stock of central bank swap instruments accordingly.
The reduction in the overnight deposit rate in September, the amount of liquidity crowded out due to the introduction of an upper limit on the stock of three-month deposits and central bank communication addressing longer-term yields had a marked influence on domestic money market rates. In addition, the stock of central bank swap instruments providing forint liquidity continued to increase and the average maturity of outstanding swap contracts lengthened, in line with the Council’s aim. The three-month BUBOR was at its historic low. Long-term yields have declined in the government securities and interbank markets since the previous interest rate decision, and therefore the difference between short and long-term yields has narrowed. However, the yield curve is still steep in international comparison.
The Council considers it important that the loose monetary conditions have their effect not only at the short but also at the longer end of the yield curve. To ensure this, the Council decided to introduce two unconventional instruments from January 2018, which will constitute an integral part of the Bank’s set of monetary policy instruments.
Accordingly, the Council will introduce unconditional interest rate swap (IRS) facilities with five and ten-year maturities, the allocation amount of which has been set at HUF 300 billion for the first quarter of 2018. The IRS facilities will be available for counterparty banks at regular tenders from the beginning of January 2018. In addition, the Magyar Nemzeti Bank will launch a targeted programme aimed at purchasing mortgage bonds with maturities of three years or more. Both programmes will also contribute to an increase in the share of loans with long periods of interest rate fixation. The Magyar Nemzeti Bank will make a decision on the operational details of the programmes in December 2017.
In the Council’s assessment, some degree of unused capacity has remained in the economy, but this is likely to be absorbed gradually as output grows dynamically. The inflation target is expected to be achieved in a sustainable manner by the middle of 2019. In the Council’s assessment, maintaining the base rate and loose monetary conditions for an extended period are necessary to achieve the inflation target in a sustainable manner. The Council will closely monitor developments in monetary conditions and will ensure the persistence of loose monetary conditions over a prolonged period by using the extended set of monetary policy instruments.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 6 December 2017."

Indonesia maintains rate, raises 2018 growth forecast

November 16, 2017 by CentralBankNews   Comments (0)

        Indonesia's maintained its benchmark 7-day Reverse Repo Rate at 4.25 percent, saying the domestic economy is continuing to grow "with a more equitable and balanced structure" and the current interest rate is sufficient to keep inflation in line with the target range and the current account at a healthy level.
       Bank Indonesia (BI), which has cut the rate twice this year by a total of 50 basis points, added it was aware of both global and domestic risks, including "limited growth in household consumption and banking intermediation," and the risks from a tightening of monetary policy in several developed economies.
        Based on rising exports and investments, BI raised its 2018 growth forecast slightly to between 5.1 - 5.5 percent from a previous 5.0 - 5.5 percent.
        Noting improved growth in the third quarter of this year, BI estimated 2017 growth of around 5.1 percent compared with its previous estimate of 5.0-5.4 percent.
        Indonesia's Gross Domestic Product grew by an annual rate of 5.6 percent in the third quarter, up from 5.01 percent in the previous two quarters, boosted by higher exports and rising commodity prices, while investments rose to the highest level since the second quarter of 2013 based on construction and non-construction investment.
        BI also sounded optimistic about global growth, saying strong exports and domestic demand are driving China's economy and restoring consumer confidence while the outlook for economic growth in both Japan and Europe have been upgraded.
      "Meanwhile, tenacious consumption and increasing investment contributed to the US economic gains," BI said.
        Indonesia's inflation rate remains low, with headline inflation easing further to 3.58 percent in October from 3.72 percent in September, with BI expecting inflation around 3.0-3.5 percent by the end of this year, within the lower end of its target range of 4.0 percent, plus/minus 1 percentage point.
       For 2018 BI expects inflation to remain within next year's target range of 3.5 percent, plus/minus 1 percentage point.
       As many other currencies, Indonesia's rupiah depreciated in October due to a rise in the U.S. dollar and was trading at 13,526 today, down 0.2 percent this year.

      Bank Indonesia issued the following statement:

"The BI Board of Governors agreed on 15th and 16th November 2017 to hold the BI 7-day Reverse Repo Rate at 4.25%, while maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 3.50% and 5.00% respectively, effective 17th November 2017. The decision was consistent with efforts to maintain macroeconomic and financial system stability as well as build economic recovery momentum, while paying due consideration to global and domestic economic dynamics. Bank Indonesia believes the current policy rate is adequate to control inflation within the target corridor and maintain a healthy current account deficit. Furthermore, the domestic economy has continued to grow, with a more equitable and balanced structure. Nonetheless, Bank Indonesia shall remain vigilant of the risks, including the global risks linked to the plans to tighten monetary policy in several advanced countries, as well as domestic risks, such as the limited growth in household consumption and banking intermediary. Bank Indonesia will continue to coordinate with the Government to reinforce the policy mix in order to maintain macroeconomic stability and financial system stability as well as to enhance structural reforms to strengthen fundamentals of Indonesia’s economy.
The global economy has continued to expand. The global economy is predicted to accelerate by 3.6% on 2017 and 2018 on the back of growth in China, Japan and Europe that has beaten previous expectations, coupled with solid economic gains in the United States. Strong exports and domestic demand are driving China’s economy and restoring consumer confidence. Furthermore, Japan’s economic outlook has been upgraded in line with the ongoing export recovery. In Europe, the economic growth projection has also been revised upwards on export performance, supported by improving world trade and domestic economic recovery. Meanwhile, tenacious consumption and increasing investment contributed to the US economic gains. Congruent with the improving world economic outlook, world trade volume (WTV) and international commodity prices are both expected to surpass the previous projections. Moving forward, Bank Indonesia shall continue to monitor the global risks, including potentially tighter monetary policy in advanced countries as well as geopolitical factors.
The national economy gained momentum in the third quarter of 2017, with more balanced growth. Domestic economic growth stood at 5.06% (yoy) in the reporting period, up from a stable 5.01% (yoy) over the past two periods. Furthermore, stronger economic growth in the third quarter of 2017 was accompanied by a more balanced structure after exports along with government and private investment performance improved. Exports were buoyed by rising commodity prices, such as crude palm oil (CPO) and coal, combined with stronger global economic growth. Furthermore, investment has posted its highest level since the second quarter of 2013, supported by building and non-building investment. On the other hand, government consumption has also increased in line with greater spending, while household consumption remains limited. By sector, the main driver of growth was the manufacturing sector and the trade, hotels and restaurants (THR) sector, as two dominant contributors to GDP and large labour absorber. Spatially, economic growth in Sumatra, Java, Bali-Nusa Tenggara, Kalimantan and Sulawesi accelerated on the back of the construction sector and manufacturing industry. In contrast, the economies of Maluku and Papua experienced a slowdown due, amongst others, to limited mining production. Consequently, Bank Indonesia predicts national economic growth in 2017 at 5.1%, improving thereafter to 5.1%-5.5% in 2018.
Indonesia’s balance of payments (BOP) increased significantly in the third quarter of 2017 after the current account deficit narrowed and the capital and financial account surplus expanded. The current account deficit stood at 1.65% of GDP in the reporting period, improving from 1.91% of GDP in the previous quarter. Stronger export performance, in terms of value and volume, helped to reduce the current account deficit despite a corresponding surge of imports to meet rising domestic demand. On the other hand, the capital and financial account enjoyed sharp gains in the third quarter of 2017 due to an influx of non-resident capital in the form of direct investment in line with investor optimism concerning the promising domestic economic outlook. Cumulatively, as of October 2017, the trade surplus had reached a total of USD11.78 billion, up from USD7.65 billion in the same period one year ago. Moreover, the position of official reserve assets at the end of October 2017 stood at USD126.5 billion, adequate to offset 8.6 months of imports or 8.3 months of imports and servicing government external debt, which is well above international adequacy standards of around three months. Throughout 2017, the balance of payments is expected to remain positive on the back of capital and financial account surplus, with current account deficit maintained at below 2% of GDP.
The Rupiah on average depreciated in October 2017, due to external factors. The rupiah depreciated by an average of 1.63% to Rp13,528 per USD in October 2017. The depreciation was in line with prevailing trends for most other global currencies against the US dollar. The US dollar appreciated globally as an impact of the financial market’s response to the nomination of The Federal Reserve Governor as well as its monetary policy stance normalisation, growing expectations of a further FFR hike and US plans for tax reform. Nevertheless, Bank Indonesia continues to stabilise the rupiah in line with its fundamental value, while maintaining market mechanisms.
Low headline inflation was maintained. Consumer Price Index (CPI) inflation in October 2017 stood at 0.01% (mtm) or 3.58% (yoy), below the October average for the past three years at 0.18% (mtm). Consequently, inflation as of October 2017 was recorded at 2.67% (ytd). Lower core inflation helped to control headline inflation in line with anchored expectations, low import prices and limited domestic demand. Furthermore, volatile foods (VF) also recorded low inflation, supported by supply-side improvements and the favourable impact of various government policies. Meanwhile, inflation of administered prices (AP) was kept under control. End of year inflation in 2017 is expected to remain low at 3.0%-3.5%, within the lower end of the 4.0±1% target range. Looking ahead, Bank Indonesia shall constantly strengthen policy coordination with the Central Government and Regional Administrations to control inflation within the target corridor, namely 3.5±1% in 2018.
Financial system stability remained stable, amid limited banking intermediation. The maintained financial system stability was reflected in the Capital Adequacy Ratio (CAR) in the banking industry which remained high at 23.0%, with a liquidity ratio of 22.6% in September 2017. At the same time, non-performing loans (NPL) were recorded at 2.9% (gross) or 1.3% (net). Meanwhile, the banking industry acknowledged slower credit growth, decelerating from 8.3% (yoy) to 7.9% (yoy). In contrast, deposit growth accelerated from 9.6% (yoy) to 11.7% (yoy) in the same period. For 2017, deposit growth is estimated at 10% while credit growth, at around 8%, is lower than expected. Considering the limited credit growth, Bank Indonesia decides to maintain the Countercyclical Capital Buffer (CCB) at 0%, to encourage the improvement of banking intermediation function. In conjunction with the relevant authorities, Bank Indonesia shall coordinate to maintain financial system stability and support economic recovery momentum."


Iceland maintains rate as economic boom slows fast

November 15, 2017 by CentralBankNews   Comments (0)

      Iceland's central bank kept its key rate on 7-day deposits at 4.25 percent, as it had flagged last month, saying the current stance "appears sufficient at present to keep inflation broadly at target" amid easing demand pressures and an improved inflation outlook.
      The Central Bank of Iceland (CBI) has cut its rate three times this year by a total of 75 basis points, with the most recent cut in October when it also said the rate was now sufficient to keep inflation broadly at the target.
       Although there are still "significant demand pressures," which call for a tight monetary stance to keep inflation under control, Iceland's booming economy is slowing faster than expected and the CBI lowered its outlook for growth this year sharply.
       The extraordinary boom in Iceland's tourism industry, the main source of export growth in the past two years, is now easing, while exports of marine products and silicon are also growing slower than expected and seen slowing further in the next few years.
       Although residential investment is still growing fast, it is now less than expected while house price inflation is also easing, helping curb inflation.
        The CBI now expects Iceland's economy to expand by 3.7 percent this year, down from 5.2 percent forecast in August and below 2016's 7.4 percent. Residential investment is seen expanding by 23.7 percent this year, down from 29.4 percent last year and 25.3 percent previously forecast.
       For 2018 the CBI is still expecting overall economic growth of 3.4 percent, up from 3.3 percent previously forecast, but growth is then seen easing toward the long-term growth trend of around 2.5 percent in 2019 and 2020.
       In the second quarter of this year Iceland's economy grew by an annual rate of 3.4 percent, down from 5.2 percent in the first quarter and over 10 percent in the previous two quarters, partly affected by a strike by fishermen that hit exports and inventories.
       With demand pressures easing and the Icelandic krona still strong, inflation remains under control although there are diminishing effects from the strong krona, the CBI said.
       This year inflation is seen averaging an unchanged 1.8 percent before rising to 2.5 percent next year, down from 2.6 percent forecast in August, and 2.3 percent in 2019, down from 2.8 percent. For 2020 inflation is seen at 2.8 percent, slightly above the CBI's 2.50 percent target.
       "Inflation expectations are well in line with the target, and fluctuations in the exchange rate during the year have had limited impact on inflation and inflation expectations," CBI said.
       Iceland's inflation rate rose to 1.9 percent in October from 1.4 percent in September while the exchange rate of the krona has been relatively stable since July. The krona was trading at 103.5 to the U.S. dollar today, up 9.1 percent this year.

        The Central Bank of Iceland issued the following statement:

"The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to keep the Bank’s interest rates unchanged. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore remain 4.25%. 
According to the Central Bank’s new macroeconomic forecast, published in Monetary Bulletin 2017/4, GDP growth will slow significantly this year, and more than the Bank projected in August. It is forecast at 3.7%, down from last year’s GDP growth rate of 7.4%, as a result of a slowdown in export growth, after several strong years, and a pickup in import growth. 
The outlook is for inflation to align with the target in mid-2018 and stay close to target for the remainder of the forecast horizon. House price inflation has eased, which will contribute to lower headline inflation if the trend continues. Counteracting this are the diminishing effects of a strong króna. The króna has appreciated since the last MPC meeting, and exchange rate volatility has eased in recent months. Inflation expectations are well in line with the target, and fluctuations in the exchange rate during the year have had limited impact on inflation and inflation expectations. 
There are indications that the output gap may have peaked. Significant demand pressures remain, however, which calls for a tight monetary stance so as to ensure medium-term price stability. Reduced demand pressures and an improved inflation outlook are consistent with the MPC’s expectations in October, and the Bank’s real rate is broadly as it was after the October interest rate decision. The current monetary stance appears sufficient at present to keep inflation broadly at target. Whether this turns out to be the case in the coming term will depend on economic developments, including fiscal policy and the results of wage settlements.

The Bank’s interest rates will therefore be: 

1. Overnight loan: 6.00%
2. 7 day collateralised lending rates: 5.00%
3. Seven-day term deposit: 4.25%
4. Current accounts: 4.00%
5. Minimum required reserves:  4.00%"


Chile holds rate, still pondering rate cut on low inflation

November 15, 2017 by CentralBankNews   Comments (0)

       Chile's central bank kept its monetary policy rate at 2.50 percent and repeated its guidance from last month that its board is paying special attention to the risk of low inflation as this "could require adjusting the policy rate."
       The Central Bank of Chile, which has cut its rate four times this year by a total of 100 basis points, added that it expects inflation to "remain low in the short term," which could delay the convergence of inflation to its target of 3.0 percent, plus/minus 1 percentage point.
       Last month the central bank's board was confronted by a decline in September inflation to 1.5 percent, with the result that financial markets priced in rate cuts.
       However, inflation then rose to 1.9 percent in October, "partly undoing the negative surprise of September," shifting those expectations toward no policy easing, according to the central bank.
       After a quarter-century of strong economic growth, Chile's economy has stagnated in the last four years and inflation remains below the central bank's target, leading to dissatisfaction with a sluggish economy, the central bank wrote in its background paper to today's board meeting.
      This has led to popular support for Presidential candidate Sebastian Pinera, president of Chile from 2010 to 2014, with the prospect of business-friendly policies boosting Chilean stocks. The presidential election is scheduled for Sunday, Nov. 19.
      However, the central bank said it expects economic growth to rebound in coming years, with growth expected to accelerate to 2.6 percent in 2018, up from 1.6 percent in 2016.
      In its September monetary policy report the central bank narrowed its 2017 growth forecast to 1.25-1.75 percent from 1.0-1.75 percent
      In the second quarter of this year Chile's Gross Domestic Product grew by only 0.9 percent, up from 0.1 percent in the first quarter, with third quarter data showing activity and demand in line with forecasts and investment still weak, affected by construction.
      Chile's peso has been appreciating steadily since January 2016 and was trading at 631.8 to the U.S. dollar today, almost 6 percent higher since the start of this year.

       The Central Bank of Chile issued the following statement:

"In its monthly monetary policy meeting, the Board of the Central Bank of Chile decided to keep the monetary policy interest rate at 2.5%.

On the external front, third-quarter activity figures are consistent with a more dynamic scenario. Global financial conditions show no major changes. The oil price increased in recent weeks, while the copper price declined slightly, but it is still above expectations.

At home, October’s CPI inflation of 0.6% exceeded the forecast, partly undoing the negative surprise of September, and placing annual inflation at 1.9%. Inflation expectations at short terms remain low, and medium-term expectations have remained constant. Third-quarter data at hand show the evolution of activity and demand in line with the latest Monetary Policy Report’s baseline scenario. Private consumption has performed in line with the labor market’s evolution and with not-so-pessimistic expectations. Investment is still weak, affected by construction activity.

Activity figures made available after the September Report are consistent with the baseline scenario and the monetary impulse depicted therein. However, inflation will remain low in the short term. This could delay its convergence to the target within the two-year horizon. The Board will pay special attention to this risk—already identified in the Report—as it could require adjusting the policy rate. At the same time, the Board reiterates its commitment to conduct monetary policy with flexibility, so that projected inflation stands at 3% over the two-year horizon."


Armenia holds rate, but gradual tightening in near future

November 14, 2017 by CentralBankNews   Comments (0)

      Armenia's central bank kept its benchmark refinancing rate at 6.0 percent for the fifth time in a row, but said a gradual neutralization of monetary stimulus will be necessary in the near future to reach the inflation target as inflation expectations were growing slightly faster than the rise in international food prices and supply at retail markets.
       However, the board of the Central Bank of Armenia (CBA) still wants to maintain the current monetary stimulus for now given the current state of inflation and inflation expectations and will adjust its monetary policy stance if inflation and other macroeconomic indices deviate from the forecast.
       The CBA has maintained its key rate since February after cutting it 12 times by a total of 450 basis points from 10.50 percent from August 2015.
       The CBA targets inflation of 12.50 - 5.50 percent around a 4.0 percent midpoint.
       Inflation in Armenia rose to 1.2 percent in October from 1.0 percent, with the CBA saying lower-than-expected fruit and vegetable prices are keeping the overall rate down but this impact will change in coming months though inflation should remain within the acceptable range.
       Over the past nine months economic activity in Armenia has been high, supported by strong growth in industry and services. Domestic demand has been recovering at a pace that is faster than expected, helped by growth in money transfers from abroad and the central bank's expansive monetary policy.
         Rising demand in Armenia - sandwiched between Turkey, Azerbaijan, Iran and Georgia - is reflected in high growth of imports, the CBA said.
       Last month the central bank noted that credit had risen 10 percent in August from July while imports had risen 14.6 percent and money transfers in the third quarter had risen a net 16.0 percent due to positive developments in Russia's economy.
        Armenia's economy grew by an annual rate of 5.5 percent in the second quarter of this year, down from 6.5 percent in the first quarter.


Peru cuts rate 25 bps, will consider more cuts if needed

November 10, 2017 by CentralBankNews   Comments (0)

      Peru's central bank cut its monetary policy rate for the fourth time this year, a move that was expected by some but not all analysts, and again said it would pay close attention to new information about inflation to consider, if necessary, further changes in its monetary policy stance.
      The Central Reserve Bank of Peru (BCRP) cut its policy rate by 25 basis points to 3.25 percent and has now cut the rate by 100 points this year following cuts of the same size in May, July and September as inflation continues to decelerate.
      Today's rate cut comes after the central bank last month also said it would consider lowering its policy rate further and the bank's president, Julio Velarde, on Wednesday said inflation was likely to end the year at about 1.9 or 2.0 percent thanks to a rapid decrease in consumer prices.
      Peru's headline inflation rate dropped to 2.04 percent in October from 2.94 percent in September, hitting a level not seen since July 2010 as prices continue to decelerate after spiking earlier this year on food shortages following heavy flooding in March that killed more than 100 people.
       Excluding food and energy, inflation eased to 2.35 percent in October from 2.45 percent.
       In today's statement, the board of BCRP noted inflation had now reached the middle of its target range of 1-3 percent and inflation is forecast to remain within the range this year and next year. Inflation expectations 12-months ahead remain within the target range and are expected to continue to decline in coming months.
       In September the central bank forecast the inflation of 2.3 percent this year but in his comments to journalists Velarde said supply, and not demand, was behind the fall in consumer prices.
       Velarde was also quoted by Reuters as saying the annual growth rate would quicken to at least 3.7 precent in the fourth quarter though it probably would not change the bank's view of a 2.8 percent expansion in 2017.
        Peru's Gross Domestic Product grew by an annual 2.4 percent in the second quarter of this year, up from 2.1 percent in the first quarter, and Velarde said the economy grew by at least 3 percent year-on-year in September thanks to mining and an ongoing recovery in construction activity.
       In its statement, the central bank said the pace of economic growth was recovering rapidly and business expectations had continued to improve in October. Expectations remain on the optimistic side although economic growth remains below the potential level.
        For 2018 Peru's government has forecast growth of 4.2 percent and earlier this month in London Velarde said this figure was perfectly attainable and some investment banks had even penciled in growth of 4.4 percent.
        Velarde also described the recovery of Peru's economy as "very V-shaped," with domestic demand growing at more than 8 percent, construction at almost 9 percent and mining investment was up over 25 percent over the last couple of months.
        Peru is the world's second largest producer of copper, with prices currently at levels not seen since September 2014.
        The exchange rate of Peru's sol has been relatively stable after falling in 2014 and 2015. Today the sol was trading around 3.2 to the U.S. dollar, up 4.7 percent this year.

      The Central Reserve Bank of Peru issued the following statement:

"1. The Board of the Central Reserve Bank of Peru approved to lower the monetary policy interest rate from 3.50 to 3.25 percent. This decision takes into account the following factors:

i. Inflation in October continued decreasing and reached the middle of the inflation target range. The measurements of inflation trends continue declining and are within the target range as well. Moreover, both measurements of inflation are forecast to remain within the target range in 2017 and 2018;
ii. Expectations of inflation in 12 months continued to be within the target range and are expected to continue declining in the following months;
iii. The pace of growth of economic activity is recovering rapidly although it continues to be below its potential growth level in a context of low inflation, and
iv. The world economy continues recovering gradually, although there is some uncertainty associated with an eventual reversal of monetary stimulus in the advanced economies.

2. The Board gives close attention to new data on inflation and inflation determinants to consider the convenience of making additional adjustments in the Central Bank’s monetary policy stance should it be necessary.

3. Recent indicators of inflation and activity reflect the following:
i. Inflation in October recorded a rate of -0.47 percent, as a result of which the year-to-year rate of inflation fell from 2.94 percent in September to 2.04 percent in October. Inflation is expected to remain within this range during 2017 and 2018. Inflation without food and energy showed a rate of 0.02 percent, as a result of which the year-to-year rate fell from 2.45 percent in September to 2.35 percent in October, also within the target range.
ii. The indicators of business expectations have continued to improve in October and remain on the optimistic side, although economic growth remains below its potential level.

4. The Board of the Central Bank also approved to lower the annual interest rates on lending and deposit operations in domestic currency (not included in auctions) between BCRP and the financial system, as specified below:
i. Overnight deposits: 2.00 percent.
ii. Direct repos and rediscount operations: i) 3.80 percent for the first 15 operations carried out by a financial institution in the last 12 months, and ii) the interest rate set by the Committee of Monetary and Foreign Exchange Operations for additional operations to the 15 first operations carried out in the last 12 months.
iii. Swaps: a commission equivalent to a minimum annual effective cost of 3.80 percent.

5. The Board of BCRP will approve the Monetary Program for December on its meeting of December 14, 2017."


Mexico holds rate, NAFTA poses risk to inflation, growth

November 9, 2017 by CentralBankNews   Comments (0)

      Mexico's central bank maintained its benchmark at 7.0 percent, as widely expected, saying uncertainty from the renegotiation of North American Free Trade Agreement (NAFTA) poses an upside risk to inflation and a downside risk to economic growth.
       But the Bank of Mexico (Banxico), which had kept its rate steady since June, also said it expects inflation to continue to decline for the rest of this year, with the trend then accelerating next year so inflation converges towards the bank's 3.0 percent target towards the end of 2018.
       Banxico has raised its rate by 400 basis points since December 2015 when the U.S. Federal Reserve began tightening its monetary policy for the first time since the global financial crises.
       Mexico's headline inflation rate rose slightly to 6.37 percent in October from 6.35 percent in September, continuing to drop from a high of 5.0 percent in August, as the central bank expected.
       Core inflation in October was was steady at 4.8 percent and Banxico expects it to remain above 4.0 percent this year and then decelerate to moderately above 3.0 percent by the end of next year.
       However, the central bank underlined its inflation forecast is subject to the risk of a fall in the peso's exchange rate in the event of an "unfavorable evolution of the NAFTA negation process" or an adverse reaction to the normalization of monetary policy in the U.S.
       After firming in the first half of this year, the peso has depreciated since late September and trading has turned more volatile in response to U.S. monetary policy, possible U.S. fiscal expansion and uncertainty regarding the outcome of NAFTA talks. The interest rate differential between the U.S. and Mexico has also risen, the central bank added.
      U.S. President Donald Trump has threatened to withdraw from NAFTA if talks don't lead to improved trading conditions for the U.S.
      The peso was trading around 19.05 to the dollar today, still up 8.7 percent this year.
      Mexico's economy has slowed down this year, with Gross Domestic Product shrinking 0.2 percent in the third quarter from the second quarter for annual growth of only 1.6 percent, down from 1.9 percent in the second quarter and 3.2 percent in the first quarter.