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Moldova cuts rate another 50 bps, but shifts to neutral

December 5, 2017 by CentralBankNews   Comments (0)

      Moldova's central bank cut its basic interest rate by another 50 basis points to 6.50 percent but shifted away from an easing stance after 22 months to a neutral stance by saying the future monetary policy configuration will be based on the risks and uncertainties associated with inflation.
       The National Bank of Moldova (NBM) has now cut its rate by 250 basis points this year and by 13.00 percentage points since February 2016 when it began lowering the rate from 19.0 percent.
        Today's guidance by the central bank compares with its guidance from October when it said it expected to continue cutting the rate in coming months as inflation was expected to fall rapidly beginning in the fourth quarter.
        According to the central bank's latest forecast, aggregate demand will continue to generate disinflationary pressures and the inflation rate is expected to return to the bank's target range of 5.0 percent, plus 1.5 percentage point in the first quarter of 2018.
       At the same time, the central bank said it had taken note of the rise in October inflation to 7.9 percent in October from 7.6 percent in September due to higher food prices from less favorable weather in the last three months.

Australia holds rate, non-mining investment rises further

December 5, 2017 by CentralBankNews   Comments (0)

      Australia's central bank kept its benchmark cash rate at 1.50 percent, as widely expected, and maintained its upbeat view of the economy, saying investment had improved "further" in the non-mining sector while economic growth is expected to average around 3 percent in the next few years.
      The Reserve Bank of Australia (RBA), which has kept its rate steady since lowering it in August 2016, also reiterated its view from last month that business conditions were positive and capacity utilization had increased, with forward-looking indicators more positive than for some time.
       In its last statement from Nov. 6, the RBA said the outlook for non-mining investment had "improved," with today's statement adding the word "further."
       Australia's economy grew by an annual rate of 1.8 percent in the first and second quarters of this year but RBA said recent data suggested the economy expanded around its trend rate in the third quarter.
       Economists are forecasting annual growth over 3 percent in the third quarter after retail sales for October rose 0.5 percent from September, higher than expected and the fastest rate since May.
      The RBA's optimism over economic growth was echoed last week by the Organisation for Economic Co-operation and Development (OECD), which called on the central bank to start raising its rate in the second half of next year as wages and prices rise. 
       Higher rates will also ease the pressure on house prices and reduce the threat of a build-up of financial imbalances, Paris-based OECD said in its latest world economic outlook.
       So far, however, there are few signs of price and wage pressure, with Australia's inflation rate down to 1.8 percent in the third quarter from 1.9 percent in the second quarter, below RBA's target of 2 - 3 percent
      While unemployment has been declining - it fell to 5.4 percent in October from 5.5 percent in September - wage growth remains low and RBA said it expects this to continue "for a while yet, although stronger conditions in the labour market should see some lift in wage growth over time."

     The Reserve Bank of Australia issued the following statement:

"At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
Conditions in the global economy have improved over 2017. Labour markets have tightened and further above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy continues to be supported by increased spending on infrastructure and property construction, although financial conditions have tightened somewhat as the authorities address the medium-term risks from high debt levels. Australia's terms of trade are expected to decline in the period ahead but remain at relatively high levels.
Wage growth remains low in most countries, as does core inflation. In a number of economies there has been some withdrawal of monetary stimulus, although financial conditions remain quite expansionary. Equity markets have been strong, credit spreads have narrowed over the course of the year and volatility in financial markets is low. Long-term bond yields remain low, notwithstanding the improvement in the global economy.
Recent data suggest that the Australian economy grew at around its trend rate over the year to the September quarter. The central forecast is for GDP growth to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved further, with the forward-looking indicators being more positive than they have been for some time. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.
Employment growth has been strong over 2017 and the unemployment rate has declined. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead. There are reports that some employers are finding it more difficult to hire workers with the necessary skills. However, wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time.
Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. The Bank's central forecast remains for inflation to pick up gradually as the economy strengthens.
The Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
Growth in housing debt has been outpacing the slow growth in household income for some time. To address the medium-term risks associated with high and rising household indebtedness, APRA has introduced a number of supervisory measures. Credit standards have been tightened in a way that has reduced the risk profile of borrowers. Nationwide measures of housing prices are little changed over the past six months, with conditions having eased in Sydney. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities.
The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time."

BIS: Echoes of Greenspan's conundrum in bond markets

December 3, 2017 by CentralBankNews   Comments (0)

       A paradox reminiscent of Alan Greenspan's "conundrum" in the 2000s is playing out these days as global financial conditions have become easier ever since the U.S. Federal Reserve began its gradual but persistent tightening of monetary policy two years ago, according to the Bank for International Settlements (BIS).

      Since the Fed in December 2015 raised its federal funds rate for the first time in almost 10 years, stock markets have surged, the yield on benchmark 10-year U.S. Treasury notes has moved sideways, corporate credit spreads have narrowed, and a key indicator of the tightness of overall financial conditions index has dropped to lows not seen in the last 24 years.
      "Can a tightening be considered effective if financial conditions unambiguously ease?," asks Claudio Borio, head of BIS' monetary and economic department, as the world's oldest international financial institution releases its December quarterly review.
      In fact, such a paradoxical outcome in financial markets is not entirely unheard of but reminiscent of the Fed's tightening from July 2004 to July 2006 when the benchmark fed funds rate was hiked to 5.25 percent from 1.00 percent. 
      During the first year of that tightening cycle, stock markets rose while long-term Treasury yields and corporate spreads dropped, leading former Fed Chairman Greenspan in 2005 to describe the fall in bond yields as a conundrum.
      The reaction of financial markets in the 2000s was in sharp contrast with previous cycles of monetary tightening, especially the one in 1994 when the Fed's action triggered sharply higher yields, stock market losses, wider credit spreads and massive currency depreciation in emerging markets.
      One explanation behind the apparent paradox may lie in the overall economy. Market participants today are anticipating a future of even lower interest rates and possibly inflation than the Fed has communicated.
      "Less appreciated perhaps, the very mix of gradualism and predictability may also have played a role, " says Borio, adding the expected pace of Fed tightening in this cycle is now expected to be the slowest on record.
      Unlike 1994, when the Fed's move was steep and less thoroughly communicated to markets, central banks are now much clearer and transparent in their policy direction, with "forward guidance" and interest rate forecasts an integral part of their monetary toolbox.
      "And scorched by the outside reaction in 1994 - not to mention the "taper tantrum" in 2013 - the central bank has made every effort to prepare markets and to indicate that it will continue to move slowly," said Borio in remarks accompanying BIS' latest review.
      The effect of this gradualism by the Fed is comforting financial markets with the belief that tighter policy will neither derail the economy nor upset asset markets. And if there are tensions in financial markets, central banks will not remain on the sidelines.
      Even the pace of the Fed's planned run-down of its  holding of U.S. Treasuries - an average of $18 billion a month until the end of 2018 - is slower than the large-scale asset purchases in the wake of the Global Financial Crises, which ranged from $45 billion to $75 billion a month.
      "Against this backdrop, easier financial conditions look less surprising," said Borio.
     But Borio also cautions the jury is still out. 
     The monetary tightening has not yet really begun and vulnerabilities built up during the unusually long period of low interest rates are still there along with frothy valuations of all assets. And the longer this level of risk taking continues, the higher the exposures become.
      "Short-run calm comes at the expense of possible long-run turbulence," said Borio.
      Click to read the BIS December 2017 Quarterly Review.
      In addition to a revamped and more timely commentary on developments in global banking and financial flows, the December review includes an analysis of credit risk transfers in which the authors document how global banks shift credit risks out of financial centers and riskier emerging market economies and into advanced economies.
       The review also includes two special features that shed light on how the stock of debt affects macroeconomic developments and financial stability. This helps show how monetary policy normalization will affect economic activity.

Angola raises rate 200 bps to reverse rise in inflation

December 1, 2017 by CentralBankNews   Comments (0)

      Angola's central bank raised its benchmark BNA rate by 200 basis points to 18 percent, saying it needed to take this measure to reverse the inflationary process given the high level of inflation.
       It is the first rate hike by the National Bank of Angola (BNA) since June 2016 and follows the appointment of a new central bank governor, Jose Massano, by the country's president in late October. Massano replaced Walter Filipe da Silva, who became governor in March 2015.
       After declining all year, Angola's national inflation rate rose to 26.25 percent in October from 25.18 percent in the previous two months.
       The monthly inflation rate in the province of Luana rose to 2.98 percent in October from 2.58 percent in September and 1.79 percent in October 2016 for an annual rate of 28.96 percent, with the largest increase coming from prices of health, miscellaneous goods and services, clothing and footwear, and alcoholic beverages and tobacco.
       In addition to the rate hike, the bank's monetary policy committee also took a series of other policy initiatives, including adopting the monetary base in domestic currency as an operational variable for monetary policy as strict monitoring of liquidity is fundamental to the stability of prices.
      While the central bank left its overnight liquidity facility at 20.0 percent, it reduced the permanent liquidity absorption facility to zero percent and will intervene with open market operations to regulated liquidity.
       It also made changes to banks' mandatory reserves, with the ratio for commercial banks' customer deposits in kwanza lowered to 21.0 percent from 30.0 percent.
       Excluded from this change are accounts held by the central and local governments, along with municipalities, with the ratio remaining unchanged.
       In addition, banks will be able to deduct 80 percent of any credit extended to agricultural, livestock, forestry and fishery projects in calculating their mandatory reserves.
       In October credit to the economy rose 0.14 percent while gross credit to the central government rose 1.84 percent, the BNA said.


Dominican Rep. holds rate, recovery after hurricanes

December 1, 2017 by CentralBankNews   Comments (0)

       The Central Bank of the Dominican Republic (BCRD) maintained its monetary policy rate at 5.25 percent, saying inflation is forecast to remain within its target range over the 24-month policy horizon while the economy was recovering after tourism and agriculture took a hit from the hurricanes of Irma and Maria.
       The BCRD said preliminary data for October showed a recovery in economic activity, helped by the stimulating impact on domestic demand from an easing of monetary policy in July.
       On July 31 the central bank cut its rate by 50 basis points and lowered the legal reserve ratio by 2.2 percentage points, which helped boost credit growth in the Dominican peso.
       Since the bank's easing measure, private credit issued in peso has grown around 11 percent year-on-year, in line with the rate of growth in the M1 measure of money supply, or currency in circulation, the central bank said.
       Hurricane Maria, which caused major damage to Puerto Rico and other parts of the Caribbean, in late September also caused damage to parts of the Dominican Republic.
      The World Bank has approved a US$150 million loan to the Dominican Republic to help deal with natural disasters and the bank has said it expects this to support economic activity in the fourth quarter of this year.
       The economy of the Dominican Republic grew by an annual rate of 2.7 percent in the second quarter of this year, down from 5.3 percent in the first quarter, while inflation eased to 3.48 percent in October from 3.8 percent in September.
      The BCRD has projected that inflation by the end of this year will be around the lower limit of its target of 4.0 percent, plus/minus 1 percentage point.


Moldova postpones board meeting due to ill health

November 29, 2017 by CentralBankNews   Comments (0)

       The central bank of Moldova has postponed today's scheduled meeting of its executive board as there is not a quorum due to the health of some of its members.
        The National Bank of Moldova (NBM) said in a statement on its website that the date of the next meeting would be determined later.
        The central bank's board comprises five members, including Governor Sergiu Cioclea.
        At its last meeting in October, the central bank lowered its basic interest rate by another 50 basis points to 7.0 percent, bringing this year's rate cuts to 200 basis points. Since embarking on an easing cycle in February last year, the key rate has been cut by 12.50 percentage points.
        Moldova's inflation rate rose to a 2017-high of 7.9 percent in October from 7.6 percent in September due to rising food prices, especially vegetables and fruits. An increase in tariffs on regulated services has also pushed up inflation.
          The NBM in October said it expected inflation to return to its target of 5.0 percent, plus/minus 1.5 percentage points, in the first quarter of 2018 and then remain within this target for the next two quarters as inflationary pressures ease from lower economic activity.
         Its Gross Domestic Product grew by an annual rate of 2.5 percent in the second quarter, down from 3.1 percent in the first quarter and 6.7 percent in the fourth quarter.
        Moldova's leu was trading at 20.26 to the euro today, up 3.1 percent this year.

Mauritius maintains rate as inflation forecast lowered

November 29, 2017 by CentralBankNews   Comments (0)

        The central bank of the Indian Ocean island of Mauritius left its key repurchase rate steady at 3.50 percent to continue supporting economic growth but added it would also "exercise vigilance should there be a resurgence of inflationary pressures in the economy."
        The Bank of Mauritius (BOM), which in September cut its repo rate for the first time since July 2016, added that its staff was now projecting headline inflation this year of 3.6 percent and around 3.5 percent in 2018, down from the September forecast of 4.0 percent and 3.8 percent, respectively.
         Inflation in Mauritius accelerated earlier this year from an increase in the prices of alcohol, tobacco and diesel oil and hit a 5-year peak of 6.4 percent in June.
         But since then, inflation has been decelerating as the transitory shock dissipates and was was steady at 3.5 percent in October and September.
         When BOM cut its rate by 50 basis points in September, the bank also said it did not expect inflationary pressures to intensify in the foreseeable future based on stable core inflation. Core inflation eased to 2.1 percent in September from 2.7 percent in August.
        Economic growth in Mauritius picked up speed in the second quarter of this year as investment spending rose and growth momentum is expected to be maintained on accommodative monetary policy, upbeat business confidence and the implementation of major public and private projects.
        Gross Domestic Product expanded by 4.1 percent in the second quarter, up from 3.4 percent in the first quarter, and bank staff maintained its forecast of real GDP growth this year of 3.8 percent and 4.2 percent in 2018.
        In September bank staff lowered its 2017 growth forecast to 3.6 - 3.8 percent from 3.8 - 4.0 percent.

        As in September, BOM's monetary policy committee was unanimous in its policy decision. At today's its meeting there were lengthy discussions of the implication of a minimum wage and a negative income tax, which was seen as a major stride in reforming the labour market.
        The Mauritian rupee, which tumbled in 2015, has been rising this year despite a period of weakening in September and October
       Today the rupee was trading at 33.7 to the U.S. dollar, up 6.2 percent this year.

         The Bank of Mauritius issued the following statement:

"The Monetary Policy Committee (MPC) of the Bank of Mauritius has unanimously decided to maintain the Key Repo Rate at 3.50 per cent per annum at its meeting today.
The MPC noted that global economic activity has continued to strengthen in the second half of 2017 amid improved growth performance of some major economies, including Japan, China, and the Euro area as well as major commodity-exporting countries. The IMF, in its October 2017 Report on World Economic Outlook, has upgraded slightly its global growth forecasts to 3.6 per cent for 2017 and 3.7 per cent for 2018.  Inflation has gained some traction globally in the second half of 2017 due to the pick-up in energy prices. Nonetheless, global inflation would remain moderate. Major central banks, with the exception of the Bank of the England, kept their policy rates unchanged but were moving prudently towards reducing their monetary stimulus packages in line with global economic recovery.
Headline inflation in Mauritius rose from 2.7 per cent in July 2017 to 3.4 per cent in October 2017. In contrast, year-on-year inflation decelerated from 5.3 per cent in July 2017 to 3.5 per cent in October 2017.  Bank staff projects headline inflation at 3.6 per cent in 2017 and around 3.5 per cent in 2018, barring major shocks.
The domestic economy recorded stronger growth of 4.1 per cent in 2017Q2 compared to 3.4 per cent and 2.6 per cent, respectively, in 2017Q1 and 2016Q2. Investment spending increased significantly while export of goods continued to contract. Real GDP growth momentum is expected to be sustained on the back of accommodative monetary conditions, upbeat business confidence, and implementation of major public and private investment projects. Bank staff maintained forecasts of real GDP growth at market prices at 3.8 per cent in 2017 and 4.2 per cent in 2018, subject to the effective implementation of infrastructural projects.  
The MPC members discussed lengthily on the implications of the introduction of the minimum wage policy and negative income tax in Mauritius. Members recognized that these initiatives are a major stride towards reforming the labour market.
The MPC decided to maintain the Key Repo Rate at 3.50 per cent with a view to continuing to support economic growth. The Committee will continue to exercise vigilance should there be a resurgence of inflationary pressures in the economy.
The MPC will issue the Minutes of its meeting on Wednesday 13 December 2017."