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Israel holds rate, sees easy stance for considerable time

February 27, 2017 by CentralBankNews   Comments (0)

    Israel's central bank left its key interest rate at 0.1 percent, as widely expected, and reiterated that it still expects to keep its monetary policy stance accommodative "for a considerable time" in light of the inflation environment, the global economy, the exchange rate of the shekel and the monetary policy of major central banks.
    The Bank of Israel (BOI), which has maintained its rate since cutting it to the current level in March 2015, also confirmed its recent view that the risks of reaching its inflation target "remain high" but higher wages and global inflation are expected to help inflation return to the target of 1-3 percent.
    Last week the BOI said in its monetary policy report for the second half of 2016 that its monetary policy committee (MPC) had stopped considering the use of unconventional monetary policy tools, such as negative interest rates or bond purchases, in light of unexpectedly strong economic growth, a strong labour market and rising inflation expectations.
    BOI staff are forecasting an unchanged policy rate until the fourth quarter of this year when the rate would be increased by 15 basis points following another 25 point hike to 0.5 percent in 2018.
    Israel's inflation rate turned positive in January for the first time since July 2014 as inflation rose to 0.1 percent from minus 0.2 percent due to higher food and housing prices.
    Economic activity in Israel is also continuing to improve with Gross Domestic Product up by an annual 3.8 percent in the fourth quarter of 2016, up from 3.6 percent in the third quarter, though the BOI said growth was boosted by "an atypical" increase in vehicle imports.
    Net of this increase, it assessed growth slightly above 3 percent, with exports growing strongly while private consumption had moderated "markedly."
    Economists are forecasting growth of 3.2 to 3.5 percent this year from 4 percent last year.
    The exchange rate of Israel's shekel has risen by 3 percent against the U.S. dollar since the previous MPC meeting on Jan. 22 through Feb. 24, the BOI said, adding that the "level of the effective exchange rate continues to weigh on the developments of goods exports."


    The Bank of Israel issued the following statement with the main considerations underlying its decision:

"The decision to keep the interest rate unchanged at 0.1 percent is consistent with the Bank of Israel's monetary policy, which is intended to return the inflation rate to within the price stability target range of 1–3 percent a year, and to support growth while maintaining financial stability. The Monetary Committee continues to assess that in view of the inflation environment, and of developments in the global economy, in the exchange rate, as well as in monetary policies of major central banks, monetary policy will remain accommodative for a considerable time.
Following are the main considerations underlying the decision:
·        " The CPI for January declined by 0.2 percent, in line with expectations. The trend of moderate increase in annual inflation continues, impacted primarily by a change in the trend of energy prices and by the dissipating of the direct effect of administrative price reductions, and the year over year inflation rate is 0.1 percent. Short-term inflation expectations are below the target, but forward expectations for medium terms, from the third year onward, are within the target range, and longer term expectations are anchored near the midpoint of the target range.
·         Real economic activity continues to improve. According to the initial estimate, GDP growth in the fourth quarter of 2016 was particularly high, impacted by an atypical increase in vehicle imports. Net of this increase, it may be assessed that the growth rate was slightly above 3 percent, with a change in the composition of uses—the growth rate of private current consumption moderated markedly, while there was strong growth of exports. The picture conveyed by the labor market remains very positive.
·         In the global economy, moderate growth continues in major advanced economies, with a continued trend of improvement in emerging markets. Positive momentum continues in financial markets, although the uncertainty regarding political developments continues to be a source of risk to continued growth. Inflation in most markets is approaching its target, but in Europe and Japan very accommodative monetary policy continues. Market assessments are that the federal funds rate will be increased twice in 2017. 
·         From the monetary policy discussion on January 22, 2017, through February 24, 2017, the shekel strengthened by 3.0 percent against the dollar, and it appreciated by 2.1 percent in terms of the nominal effective exchange rate. The shekel has appreciated by 7.4 percent over the past 12 months in terms of the nominal effective exchange rate. The level of the effective exchange rate continues to weigh on the development of goods exports.
·         There was a sharp decline in home prices in the most recent data, in parallel with a decline in the number of transactions. These figures are consistent with the decline in monthly mortgage volume, the increase in mortgage interest rates, and efforts to increase supply. However, it is too early to assess, based on a single figure, if the trend in home prices is changing. 
The Monetary Committee is of the opinion that the risks to achieving the inflation target remain high, yet the increases in wages and in global inflation are expected to support the return of inflation to the target. The Bank of Israel will continue to monitor developments in the Israeli and global economies and in financial markets. The Bank will use the tools available to it to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, and in this regard will continue to keep a close watch on developments in the asset markets, including the housing market."

Colombia cuts rate 25 bps to counter softer economy

February 24, 2017 by CentralBankNews   Comments (0)

    Colombia's central bank cut its key interest rate by another 25 basis points to 7.25 percent and said inflation, economic activity and international developments would determine the pace of policy normalization.
     It is the first policy easing by the Central Bank of Colombia this year but the second rate cut since December last year for total cuts of 50 basis points. In August 2016 the central bank paused in a tightening cycle after raising rates by 325 points to curb accelerating inflation.
     The central bank said the rate cut reflected a weakening economy and the risks of excessive deceleration, uncertainty about how fast inflation would converge to the bank's 3.0 percent target and a real policy rate that is contractionary.
     Four members of the central bank's board approved the rate cut while two members wanted to maintain the rate. Last month, when the central bank left its rate steady, four board members supported that decision.
    Colombia's inflation rate decelerated for the sixth consecutive month in January to 5.47 percent from 5.75 percent in December while analysts' expectations to December 2017 rose and continue to remain above the 2-4 percent target range. But expectations as expressed in public bonds remained stable and between 3.7 percent and 4.8 percent for the next 2, 3 and 5 years.
    Colombia's economy improved to growth of annual growth of 1.6 percent in the fourth quarter of last year for average 2016 growth of 2.0 percent, higher than the 1.8 percent that the central bank estimated in January.
     But consumer confidence in January fell sharply and if this affects household spending, the growth forecast for this year may be lowered to 2.0 percent, within a range of 0.7 and 2.7 percent, the bank said. In January the central bank also forecast 2.0 percent growth this year.

    The Central Bank of Colombia issued the following statement:

"The Board of Directors of Banco de la República at today’s meeting decided to reduce the benchmark interest rate by 25 bp to 7.25%. For this decision, the Board mainly took into account the following aspects:
  • In January, annual consumer inflation decreased for sixth consecutive month, reaching 5.47%. The average of core inflation indicators remained stable at 5.61%. Analysts’ inflation expectations to December 2017 increased, and continue above the range of 2.0% to 4.0%; those to two years and those embedded in public debt bonds to 2, 3, and 5 years remained stable, posting between 3.7% and 4.8%. 
  • The effects of the strong transitory supply shocks that diverted inflation from its target continue to fade. For example, the slowdown of the food CPI in January suggests this. 
  • External demand growth is expected to be higher in 2017 than in 2016. The long-term international interest rates remain at levels higher than those recorded in 2016 and the Colombia’s terms of trade are still recovering. In this environment, the peso has appreciated vis-à-vis the US dollar.
  • In Colombia, economic growth in the fourth quarter of 2016 was 1.6%, slightly better than in the third quarter; for the whole year it stood at 2.0%. The consumer confidence indicator for January 2017 recorded a sharp fall. Should this be reflected on household spending, the growth forecast for 2017 could be reduced (2.0% within a range between 0.7% and 2.7%). 
  • Considering the current level of core inflation indicators and inflation expectations, various calculations of the real policy interest rate are above its average since 2005.
Based on this information, the Board considered the following factors in its decision:
  • The weakness of economic activity and the risk of an excessive deceleration. 
  • Uncertainty about the speed of convergence of inflation to its target.  
  • The current level of the real policy interest rate is contractionary.
In this environment, the Board considered that the path of policy interest rates compatible with an adequate balance of the aforementioned risks includes a 25 bp reduction. The new information on inflation, economic activity, and the international context will determine the pace of policy normalization.
The decision to reduce the benchmark interest rate was approved by four members of the Board. The remaining two Board Members voted in favor of keeping the benchmark interest rate at 7.5%."

Brazil cuts rate 75 bps, sees easing to 9.5% end-2017

February 23, 2017 by CentralBankNews   Comments (0)

    Brazil's central bank lowered its benchmark Selic rate by another 75 basis points to 12.25 percent and reiterated its guidance that further rate cuts and possible changes to the pace of easing will continue to depend on the forecast and expectations for inflation.
    The Central Bank of Brazil has now cut its rate by 200 basis points since embarking on an easing cycle in October last year and by 150 points this year alone following January's larger-than-expected 75-point rate cut due to decelerating inflation and a slowing economy.
    The central bank's monetary policy committee, known as Copom, was unanimous in its decision, which was without bias, and said it expected inflation to ease to around 4.2 percent this year and around 4.5 percent for 2017 based on cutting the key rate to 9.5 percent by the end of this year and 9.0 percent by the end of 2018.
    Fresh economic data also show signals that are consistent with a stabilization of the economy and a gradual recovery of activity during this year while inflation is expected to continue to decelerate as inflation expectations for this year fell to around 4.4 percent.
     Brazil's inflation rate fell further to 5.35 percent in January from 6.29 percent in December, well within the central bank's 2.5-6.5 percent tolerance range, and sharply lower than 2015's inflation rate of 10.67 percent and below 2014's 6.41 percent.
    For 2017 and 2018 the tolerance range has been narrowed to 1.5 percentage points but around the same midpoint of 4.50 percent. In June the government is expected to reduce the midpoint target slightly with most economists looking at a new target for 2019 of 4.25 percent.
    However, that would still remain above most other countries, including those in South America, where Chile and Colombia target 3 percent, like most emerging market economies, whereas Peru targets 2 percent, a level that is typically found in developed economies.
    Brazil's economy shrank by an annual rate of 2.9 percent in the third quarter of last year, down from a 3.6 percent drop in the second quarter.

    The Central Bank of Brazil issued the following statement:

"The Copom unanimously decided to reduce the Selic rate to 12.25 percent per year, without bias.

The following observations provide an update of the Copom's baseline scenario:
The set of indicators of economic activity released since the last Copom meeting shows some mixed signals, which are, however, consistent with stabilization of the economy in the short run. Available evidence suggests a gradual recovery of economic activity during the course of 2017;
The global outlook remains quite uncertain. Nevertheless, stronger global economic activity and its positive impact on commodity prices have so far mitigated the effects on the Brazilian economy of revisions of economic policy in some large economies;
Inflation developments remain favorable. The disinflation process is more widespread, and includes IPCA components that are most sensitive to the business cycle and monetary policy. Food price disinflation resumed, which constitutes a favorable supply shock;
Inflation expectations for 2017 collected by the Focus survey fell to around 4.4%. Expectations for 2018 and longer horizons remained around 4.5%; and
The Copom's inflation forecasts in the market scenario retreated to around 4.2% for 2017, and remained around 4.5% for 2018. This scenario assumes a path for the policy interest rate that ends 2017 and 2018 at 9.5% and 9%, respectively.
The Committee emphasizes that its baseline scenario involves risks in both directions: (i) the highly uncertain global outlook might make disinflation more difficult; (ii) the favorable food-price shock might produce second-round effects and, thus, contribute to additional reductions of inflation expectations and inflation in other economic sectors; and (iii) the recovery of economic activity might be more (or less) gradual and delayed than currently anticipated.
The Committee highlights the importance of approval and implementation of the necessary reforms – notably those of fiscal nature – and of adjustments in the Brazilian economy for the sustainability of disinflation and for the reduction of its structural interest rate.
Taking into account the baseline scenario, the current balance of risks, and a wide array of available information, the Copom unanimously decided to reduce the Selic rate to 12.25 percent per year, without bias. The Committee judges that convergence of inflation to the 4.5% target over the relevant horizon for the conduct of monetary policy, which includes 2017 and, with a gradually increasing weight, 2018, is compatible with the ongoing monetary easing process.
The Copom judges that the extension of the monetary easing cycle will depend on estimates of the structural interest rate of the Brazilian economy, which the Committee will continue to reassess over time.
The Copom emphasizes that a possible acceleration of the pace of monetary easing will depend not only on the estimated extension of the cycle, but also on the evolution of economic activity, on the other risk factors, and on inflation forecasts and expectations.
The following members of the Committee voted for this decision: Ilan Goldfajn (Governor), Anthero de Moraes Meirelles, Carlos Viana de Carvalho, Isaac Sidney Menezes Ferreira, Luiz Edson Feltrim, Otávio Ribeiro Damaso, Reinaldo Le Grazie, Sidnei Corrêa Marques, and Tiago Couto Berriel."

Zambia cuts rate 150 bps in first easing since 2012

February 22, 2017 by CentralBankNews   Comments (0)

     Zambia's central bank cut its policy rate by 150 basis points, the reserve ratio by 250 points and the overnight lending facility rate by 400 points citing a sharp fall in inflation, continued appreciation of the kwacha's exchange rate and improving economic prospects.
     It is the first cut in rates by the Bank of Zambia since since the current policy rate was introduced in March 2012 when the bank moved away from targeting money supply. It is also the first change in rates since November 2015 when the tightening cycle came to an end.
    Today's rate cut brought the policy rate down to 14.00 percent from 15.50 percent, the overnight lending facility rate was narrowed to 600 basis points above the policy rate from 1,000 points, and the statutory reserve ratio was lowered to 15.50 percent from 18.0 percent.
    "The Bank of Zambia will closely monitor domestic and external developments and stands ready to take appropriate monetary policy measures on price and financial system stability that support the diversification and growth of the economy," the central bank said.
      Zambia's inflation rate fell to 7.0 percent in January from 7.5 percent in December and down from 22.9 percent in January 2016, reflecting dissipation of base effects, the rise in the Kwacha and a deceleration in both food and non-food inflation.
    The central bank expects inflation to remain within its 2017 target range of 6-8 percent in the medium term, with risks favoring low and stable inflation from expected normal to above normal rainfall, fiscal consolidation and a projected improvement in global economic growth.
     Zambia's is Africa's second-largest copper producer and its economy has suffered from the fall in global commodity prices, strained public finances, electricity shortages, subdued consumption and low investment.
    But the central bank said economic growth prospects are now improving, with Gross Domestic Product seen rising by 3.9 percent and 4,6 percent this year and 2018, respectively. Growth is underpinned by an improving agricultural sector, due to better weather, increased energy supply and minerals production.
    The government's 2017 budget was approved in December with the aim of reducing the budget deficit to 7.0 percent of GDP and the central bank said an effective implementation would present a good base for rebalancing fiscal and monetary policies.
    The external sector is also expected to improve this year due to a recovery in export prices, a stable exchange rate and higher foreign reserves, which ended last year at US$2.4 billion, the equivalent of 3.3 months imports.


Mauritius keeps rate, still preparing for new framework

February 20, 2017 by CentralBankNews   Comments (0)

    The central bank of Mauritius left its key repo rate at 4.0 percent, saying rising business confidence and public investment should support domestic output this year while an uptick in global commodity prices, especially energy, remain a key upside risk to inflation.
    The Bank of Mauritius, which cut its rate by 40 basis points last year, added it was still working on achieving "the necessary conditions" before implementing a new monetary policy framework.
    In its last statement from November, the central bank said it planned to implement the new framework early this year. It would be the first change in framework since December 2006.
    The economy of Mauritius expanded by an annual rate of 4.0 percent in the third quarter of last year, up from 2.5 percent in the previous quarter, but the central bank "noted with concern" the recent adverse performance of exports but still maintained its forecast for 2017 growth of 3.8-4.0 percent.
    Headline inflation eased to 1.8 percent in January from 2.3 percent in December but the central bank said underlying measures remain stable below 3 percent and bank staff project headline inflation of about 2.5 percent for 2017.
    The Mauritian rupee, which fell sharply in 2014, has been firming this year and was trading at 35.3 to the U.S. dollar today, slightly up from 35.85 at the start of this year.

     The Bank of Mauritius issued the following statement:  

"The Monetary Policy Committee (MPC) of the Bank of Mauritius unanimously decided to keep the Key Repo Rate unchanged at 4.00 per cent per annum at its meeting today.
Growth in major advanced economies is likely to strengthen in 2017. The IMF’s World Economic Outlook Update released in January 2017 projects world growth to increase from 3.1 per cent in 2016 to 3.4 per cent in 2017 and further to 3.6 per cent in 2018. Growth in both advanced economies and emerging market and developing economies are also expected to gather pace in 2017 and 2018. However, the MPC noted that there may be downside risks to global growth as the external environment continues to be characterised by increasing risks and uncertainties. Global inflationary pressures are expected to be relatively stronger in 2017, partly due to the on-going accommodative monetary policy stances and recent increases in commodity prices.
Real GDP for Mauritius grew by 4.0 per cent in 2016Q3, supported by strong domestic demand conditions, marking a significant pick-up over the 2.5 per cent and 2.8 per cent growth recorded in 2016Q2 and 2015Q3, respectively. Growth, in the same quarter, was reinforced by the continued strong performance of key services sector and the rebound in the construction sector. Rising business confidence and higher public investment are expected to provide support to domestic output in 2017. The MPC, however, noted with concern the recent adverse performance of exports of goods. Bank staff maintains its projections for real GDP growth between 3.8 – 4.0 per cent for 2017.
Headline inflation ticked up slightly since the last MPC meeting, while year-on-year inflation showed some volatility due to base effects. The underlying measures of inflation remained stable at below 3 per cent. Current domestic and external economic conditions are expected to contribute to headline inflation in the near term. Bank staff projects headline inflation at about 2.5 per cent for calendar year 2017. The uptick in international commodity prices, especially energy prices, if persistent, would remain the key upside risk to domestic inflation.
The MPC viewed that holding the Key Repo Rate unchanged is consistent with economic conditions in the foreseeable future.
The Bank has sterilised excess liquidity to the tune of Rs59 billion as at 17 February 2017. The MPC took the view that the Bank should continue its efforts to achieve the necessary conditions prior to the implementation of the new monetary policy framework and for an effective transmission to the real sector.
The MPC will issue the Minutes of its meeting on Monday 6 March 2017."

Kazakhstan cuts rate 100 bps, room for new cuts limited

February 20, 2017 by CentralBankNews   Comments (0)

    Kazakhstan's central bank lowered its base rate by another 100 basis points to 11.00 percent but said "the potential of further easing of monetary policy is limited" as the new level reflects the long-run balance between price stability and financial stability.
    The National Bank of Kazakhstan has now cut its rate by 600 basis point since starting an easing cycle in May 2016 and today's cut follows last month's guidance that it would ease its policy today provided that the decline in inflation continues and confidence in the tenge currency remains.
   "The decrease in inflationary expectations, the stability and the predictability of the situation on the domestic FX and money markets, the recovery of business activity, and also the favorable external economic conditions caused the easing of monetary conditions," the central bank said.
    Kazakhstan's inflation rate decelerated to 7.9 percent in January from 8.5 percent in December, falling into the central bank's target range of 6-8 percent for the first time since September 2015.
    The drop in inflation was in line with the central bank's forecast and higher commodity prices are not expected to have a significant impact on future inflation as they will be offset by moderate price trends in other consumer goods and services.
     The latest surveys of inflation expectations also shows a declining trend to the lowest level since mid-2016, with expectations within the target range and at 6.6 percent for January, below actual inflation.
    "In the absence of adverse shocks, inflation will persistently remain within the target band throughout the entire year of 2017, and also during the first half of 2018," the central bank said.
    Last month the central bank forecast that inflation would end 2017 between 7.3 and 7.7 percent but it did not repeat this forecast today. The central bank's director of research and statistics has forecast 2018 inflation of 5-7 percent, 4-6 percent for 2020 and below 4 percent in 2020.
    The exchange rate of Kazakhstan's tenge, which fell sharply in August 2015 following the central bank's move to a floating exchange rate regime, has been firming in recent months and was trading at 318.79 to the U.S. dollar today, up 4.6 percent this year.
    The central bank's move to a floating exchange rate regime last year came in response to capital outflows and the conversion of many tenge bank deposits to foreign currency. Oil accounts for about 60 percent of Kazakhstan's exports and over 10 percent of its Gross Domestic Product. 
    The central bank said devaluation expectations, and the cost of hedging exchange rate risks, had continued to decrease and the share of foreign currency deposits have declined to 53 percent by the end of January.
    Economic activity in Kazakhstan is also continuing, the bank said, saying Gross Domestic Product is estimated to grow above 2 percent this year.
    In the first three quarters of 2016 Kazakhstan's GDP grew by an annual rate of 0.4 percent.

     The National Bank of Kazakhstan issued the following statement:

"The National Bank of Kazakhstan has decided to reduce the base rate to 11% with a corridor of +/- 1%. In January 2017 the annual inflation rate has reached the target band of 6-8%. The decrease in inflationary expectations, the stability and the predictability of the situation on the domestic FX and money markets, the recovery of the business activity, and also the favorable external economic conditions caused the easing of the monetary conditions. The new level of the base rate reflects the long-run balance between the price stability and the financial stability; therefore, the potential of the further easing of the monetary policy is limited.
The decision on the base rate was made with the account of the following factors.
The annual inflation rate has slowed down in January 2017 to 7.9%, which completely matches the forecasts of the National Bank. The acceleration of the price growth in the specific commodity markets and in the paid services will not have a significant impact on the dynamics of the overall level of inflation and will be offset by the moderate price tendency in the markets of other consumer goods and services.
According to the survey taken in January on the inflationary expectations of the population, the observed tendency of improved expectations of respondents regarding the future level of inflation indicates the mitigation of their pro-inflation behavior. Quantitative assessment of the inflationary expectations shows that the expectations of the population are formed within the target band and fixed on the levels (6.6% in January) that are lower than the actual inflation Furthermore, the share of the respondents, who expect the high level of inflation, has decreased to the lowest value since the middle of the last year.
So, in case of the absence of the adverse shocks, the inflation will persistently remain within the target band throughout the entire year of 2017, and also during the first half of 2018.
Devaluation expectations not only of the population, but also of the professional market participants, have been decreasing, which is reflected in the survey outcome and the hedging cost of exchange rate risks.
The deposit market data show the ongoing process of de-dollarization of the bank deposits and the continuing tendency of depositors’ preferences towards national currency. According to the preliminary data, the share of the foreign currency deposits has decreased to 53% by the end of January 2017.
The signs of the economic recovery are getting more defined. Short-term economic indicator, which reflects the development of economy’s main sectors, is in the recovery zone and has reached 103.8% in January 2017. In 2017 the real GDP growth is estimated to be above the level of 2%.
In spite of the positive signals of the business activity recovery and the stability of the domestic money and FX markets, the possibility of the external and internal shocks occurrence, which have the potential risks for the further economic development and, primarily, for the inflation processes, still exists. Among those the following risks should be noted: external risks associated with high dependence on the quotations in the world commodity and financial markets, the speed of the economic recovery of the countries – trade partners; and also the revision of budget expenditures upwards. Next decisions on the base rate will depend on the further dynamics of the fundamental factors of the domestic demand and the stability of the financial sector.
The next decision on the base rate will be announced on April 10, 2017 at 17:00 Astana time."


Egypt holds rate steady, expects inflation to decline

February 16, 2017 by CentralBankNews   Comments (0)

    Egypt's central bank left its key interest rates on hold for the third time in a row, as expected, and said inflation is expected to drop after the impact of temporary effects subside, helped by its preemptive monetary policy actions, absorption of liquidity and favorable base effects.
     The Central Bank of Egypt (CBE) surprised financial markets in November last year by hiking its policy rates, including the benchmark overnight deposit rate, by 300 basis points as part of a liberalization of foreign exchange markets. This took last year's rate rises to a total of 550 points.
    Egypt's headline inflation rate soared to 28.1 percent in January, the highest since December 1989, from 23.3 percent in December last year as government reform measures, including higher custom tariffs,  changes to hydrocarbon subsidies and higher import prices, push up consumer prices.
    It is the third month in a row of accelerating inflation and compares to a rate of 19.4 percent in October, before the Egyptian pound was allowed to float on foreign exchange markets.
    Core inflation, which excludes fuel and food, rose to 30.86 percent from 25.86 percent in December.
    "Developments in the external environment show that there has been some firming of international commodity prices, while low global inflation and subdued global growth, albeit recovering, maintain weak pressures on domestic prices," the CBE said.
    The scrapping of the currency peg immediately hit Egypt's pound, but during the last month it has been firming as foreign investors purchase stocks and government bills.
    A rising pound should help reduce the costs of imports and thus inflation which has soared in the wake of the pound's depreciation and government reform measures, such as reduced price subsidies.
    The pound was trading at 16.1 to the U.S. dollar today,  up 12.4 percent since the start of this year but still down 45 percent since last October, days before it was allowed to float from its peg of around 8.8 to the dollar on Nov. 3. Prior to full liberalization, the CBE in March 2016 devalued the pound by almost 14 percent, to 8.95 per dollar.
    Egypt's economy has been suffering since the Arab Spring and popular uprising in 2011 that led to the overthrow of Hosni Mubarak and scared off foreign tourists and investors.
     Economic output slowed to growth of 3.4 percent in the first quarter of the 2016/17 financial year, which began on July 1, after averaging 4.3 percent in 2014/15 and 2015/16.
     Slower growth was mainly due to consumption while fixed investments were steady while higher private investment offset lower public investment.
     The drag from a negative contribution of exports narrowed as exports recovered for the first positive contribution to Gross Domestic Product since the second quarter of 2014/15 while the negative contribution of imports lessened, CBE said.
    In addition, unemployment continued to decline, falling to 12.4 percent in the second quarter of 2016/17 from a peak of 13.4 percent in the second quarter of 2013/14.

    The Central Bank of Egypt issued the following statement:

"In its meeting held on February 16, 2017, the Monetary Policy Committee (MPC) decided to keep the overnight deposit rate, overnight lending rate, and the rate of the Central Bank of Egypt's (CBE) main operation unchanged at 14.75 percent, 15.75 percent, and 15.25 percent, respectively. The discount rate was also kept unchanged at 15.25 percent.

Annual headline inflation rose to 28.14 percent in January 2017 due to exceptional monthly increases averaging 4.01 percent between November 2016 and January 2017 that were strongly impacted by the economic reform measures. The higher monthly inflation in January (4.07 percent) compared to December (3.13 percent) is estimated to be partly driven by relatively higher regular monthly dynamics as well as the introduction of higher custom tariffs in the end of 2016.

Between November 2016 and January 2017, inflation has been mainly driven by tradable items, while the contribution of non-tradable items started to decline in December, confirming cost-push factors to be the main inflation driver. Core items experienced the largest increases, particularly food, while the joint contribution of retail and services has been narrowing in relative terms. In the meantime, non-core food prices (volatile food) and regulated prices also rose somewhat in January. Given the increases in core items, annual core inflation rose to 30.86 percent in January 2017 due to average monthly inflation of 4.89 percent between November 2016 and January 2017 .

Annual real GDP growth declined to 3.4 percent in 2016/17 Q1 after averaging 4.3 percent between 2014/15 and 2015/16. The drop was mainly driven by consumption, while the contribution of gross fixed investment held steady as the increase in private investment offset the decline in public investment. Furthermore, the negative contribution of net exports narrowed, mainly due to the recovery of exports which registered its first positive contribution to real GDP growth since 2014/15 Q2, while the negative contribution of imports lessened. Labor market data show that the unemployment rate narrowed to 12.4 percent in 2016/17 Q2, continuing its downward trend after peaking at 13.4 percent in 2013/14 Q2.

Developments in the external environment show that there has been some firming of international commodity prices, while low global inflation and subdued global growth, albeit recovering, maintain weak pressures on domestic prices.

From the monetary perspective, annual broad money growth has been strongly affected by the revaluation effects of its foreign currency components. Excluding revaluation effects, higher broad money growth during November and December came mainly due to the recovery of net foreign assets, evident by the CBE's international reserve accumulation. In the meantime the growth of reserve money is expected to be impacted by the phasing out of monetary financing of the fiscal deficit.

Looking ahead, annual inflation is expected to drop after transitory cost-push effects subside and monthly inflation rates decline, supported by preemptive monetary policy actions, term absorption of excess liquidity, as well as favorable base effects.

Consistent with the inflation outlook, the targeted disinflation path, and given the balance of risks, the MPC judges that the key CBE rates are currently appropriate. The MPC reiterates its price stability mandate and will continue to closely monitor all economic and monetary developments, and will not hesitate to adjust the key CBE rates to ensure price stability over the medium-term."


Indonesia holds rate, global risks demand high vigilance

February 16, 2017 by CentralBankNews   Comments (0)

    Indonesia's central bank left its benchmark BI 7-day Reverse Repo rate steady at 4.75 percent, as widely expected, but warned in no uncertain terms about the risks it faces from changes to United States policy, the impact of Brexit and events in Europe.
    "Several global risks demand heightened vigilance," Bank Indonesia said, adding domestic risks include the impact on inflation from the government's increase of electricity rates, special fuel prices and vehicle registrations.
    Bank Indonesia (BI) cut its BI-7 day RR rate twice last year by a total of 50 basis points following four cuts in its previous benchmark rate by a total of 100 points from January through June.
     Despite the risks it faces, BI said the global economy had improved on the back of gains in the U.S. and China and rising commodity prices, and this momentum is expected to continue.
     But the central bank said U.S. fiscal expansion along with an earlier-than-expected monetary tightening could push up the dollar and while a relaxation of U.S. financial regulations would boost domestic financial activities, it "may elevate risks in the global financial system stability."
     In addition, a protectionism in the U.S., along with Brexit and European risks, could "reduce the world trade volume and increase global uncertainty."
     However, BI's baseline forecast is for Indonesia's economy to expand by 5.0 to 5.4 percent this year - up from 5.02 percent in 2016 and 4.88 percent in 2015 - on strong private consumption, higher government spending and improved private and government investments. Exports are also expected to rise along with imports due to domestic demand.
     Inflation in Indonesia is also under control despite what BI described as a "slight bump" in January as higher administered prices pushed up headline inflation to an annual rate of 3.49 percent from 3.02 percent.
     The central bank said it would continue to strengthen its coordination with the government to control inflation in the face of risk from administered prices, a reform to energy subsidies and the risk of rising, volatile food prices.
    "With these steps, Bank Indonesia predicts inflation within the target corridor for 2017, namely 4+/-1%," BI said.
     After being hit by the election of Donald Trump as U.S. president in November, the rupiah has stabilized and firmed as foreign capital has flowed back into the country on a promising domestic outlook.
    The rupiah was trading at 13,303 to the U.S. dollar, up 1.5 percent this year.

    Bank Indonesia issued the following statement:

"The BI Board of Governors agreed on 14th and 16th February 2017 to hold the BI 7-day (Reverse) Repo Rate (BI-7 day RR Rate) at 4.75%, while maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 4.00% and 5.50% respectively. The decision is consistent with Bank Indonesia’s efforts to maintain macroeconomic and financial system stability, while preserving domestic economic recovery momentum. Congruent with the global economic improvements, stronger economic growth in Indonesia is expected, with maintained macroeconomic and financial system stability at home. Nevertheless, Bank Indonesia shall remain vigilant of global risks in the form of US policy direction and geopolitical risks in Europe, as well as domestic risks linked to the impact of administered prices (AP) on inflation. To that end, Bank Indonesia will constantly seek to optimise its monetary, macroprudential and payment system policy mix in order to maintain macroeconomic and financial system stability. Furthermore, Bank Indonesia will also strengthen policy coordination with the Government, focusing on controlling inflation within the target corridor as well as ongoing structural reforms to support sustainable economic expansion.
The global economy improved on the back of gains in the US and China, as well as rising international commodity prices. US economic momentum is expected to persist, driven by increased consumption and investment. Meanwhile, robust growth in China is also predicted in line with the gradual economic rebalancing process. On the other hand, world commodity prices, including oil and Indonesia’s export commodities, has shown improvement. Nevertheless, several global risks demand heightened vigilance. The US fiscal expansion plan amid signals of monetary tightening can prompt the US currency strenghtening as well as earlier than expected policy rate adjustment. Relaxations in the US financial sector, while boosting domestic financial activities in the US, may elevate risks in the global financial system stability. Moreover, the US protectionism trade policy, the approval of “Hard Brexit” by the British parliament and several geopolitical risks in Europe, can reduce the world trade volume and increase global uncertainty.
At home, economic growth accelerated on strong household consumption, and improvements in exports and investment. The national economy achieved 5.02% (yoy) growth, up from 4.88% (yoy) in 2015. Households were inclined to consume as controlled inflation helped maintain public purchasing power. Exports improved on the back of the increasing world trade volume and several commodity prices such as coal and palm oil. Stronger investment was down to non-building investment in the form of automotive and other equipment, while building investment slowed down along with the lower fiscal stimulus. Regionally, the islands of Sumatra and Java supported stronger national economic growth, while growth in Eastern Indonesia continued to moderate. Bank Indonesia projects economic growth in 2017 at 5.0-5.4% (yoy), on the back of strong private consumption, increase in government consumption, and improvements in both private and government investments. Export growth is expected to increase, coupled with increasing imports due to domestic demand. 
The balance of payments (BOP) recorded a surplus totalling USD4.5 billion in the fourth quarter of 2016, bolstered by a narrower current account deficit and a significant capital and financial account surplus. The current account deficit stood at USD1.8 billion (0.8% of GDP) in the fourth quarter, down considerably from USD4.7 billion (1.9% of GDP), supported by gains in the goods trade balance and primary income account. Economic momentum in trading partner countries and elevated international commodity prices translated into a larger goods trade surplus. On the other hand, the capital and financial account recorded a significant surplus totalling USD6.8 billion, with a growing other investment surplus confirmed as the main contributor along with repatriated funds from the successful tax amnesty. For the year, the BOP recorded a surplus totalling USD12.1 billion, significantly improved from the USD1.1 billion deficit posted in 2015. Consequently, the position of reserve assets at the end of December 2016 stood at USD116.4 billion, increasing thereafter in January 2017 to USD116.9 billion, equivalent to 8.7 months of imports or 8.4 months of imports and servicing government external debt, which is well above the international adequacy standard of three months.
After suffering in the fourth quarter of 2016, the rupiah relatively stabilized with a tendency to strenghten amid uncertainty regarding policy direction in the United States. In the fourth quarter of 2016, point-to-point, the rupiah depreciated 3.13% (ptp) to a level of Rp13,473 per USD. Pressures on the rupiah originated from increased global uncertainty due to the US presidential election, the FFR hike and increased demand for USD to service government external debt at yearend. However, the rupiah rebounded 0.9% to Rp13,352 per USD in January 2017 as foreign capital flowed back into the country on the promising domestic economic outlook perceived by investors. Bank Indonesia will continue to monitor global financial uncertainty, while instituting measures to stabilise the rupiah in line with the currency’s fundamental value and maintaining market mechanisms. 
Inflation remained under control, despite the slight bump recorded at the beginning of 2017. Administered prices (AP) and core inflation pushed CPI inflation to 0.97% (mtm) in January 2017, accelerating from 0.42% (mtm) the month earlier. Meanwhile, inflationary pressures on volatile foods (VF) were controlled and low, along with various food price corrections. The government raised administered prices (AP) through higher administration price to extend vehicle registrations as well as more expensive electricity rates and special fuel prices. Core inflation was controlled at 0.56% (mtm) or 3.35% (yoy) despite a moderate increase. Bank Indonesia will continue to strenghten coordination with the government to control inflation, specifically in the face of several risks stemming from administered prices, as the government reforms energy subsidies, as well as the risk of rising volatile food prices. With these steps, Bank Indonesia predicts inflation within the target corridor for 2017, namely 4±1%.
The financial system remained stable, supported by banking system resilience and financial market stability. In December 2016, the Capital Adequacy Ratio (CAR) stood at 22.7% and the liquidity ratio at 20.9%, while non-performing loans (NPL) were recorded at 2.9% (gross) or 1.2% (net). Throughout January-December 2016, monetary and macroprudential policy easing has led to lower rates on term deposits by 122 bps and loans by 79 bps. Based on the type of loan, the interest rates on working capital loans decreased by 110 bps, investment loans by 91 bps and consumer loans by 29 bps. Meanwhile, credit growth was recorded at 7.9% (yoy), down from 10.5% (yoy) one year earlier. This was due to the low demand on loans along with corporate consolidation and the sluggish global economic growth. Conversely, deposit growth has accelerated from 7.3% (yoy) to 9.6% (yoy) over the same period, driven by an influx of repatriated funds at yearend as part of the successful tax amnesty. Economic financing through the capital market, including IPOs and rights issues, corporate bonds and medium-term notes (MTN), also increased. Bank Indonesia projects credit and deposit growth to accelerate in 2017 to 10-12% and 9-11% respectively on the back of increasing economic activity, coupled with the looser monetary and macroprudential policy stance adopted."