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Paraguay cuts rate 25 bps as inflation starts to decelerate

May 25, 2016 by CentralBankNews   Comments (0)

    Paraguay's central bank cut its monetary policy rate by 25 basis points to 5.75 percent, saying the balance of risks in the domestic and external economy had changed, allowing it to adopt a more expansive monetary policy in a timely manner.
    The Central Bank of Paraguay raised its rate by 25 points in January after cutting it by 100 basis points in 2015. But since the rate hike, inflation has decelerated.
   In April inflation eased to 4.5 percent from 4.7 percent in March and a 2016-high of 5.2 percent in January.
    The rise in inflation in the first months of this year was largely due to volatile food prices and the International Monetary Fund said earlier this month the country's inflation rate was expected to decline to 4.5 percent during this year and remain at that level next year.
    The central bank targets inflation of 4.5 percent, plus/minus 2 percentage points.
    The central bank said the decline in inflation was expected and while overall economic activity was expanding moderately, certain sectors had slowed.
    Paraguay's economy grew by an estimated 3 percent last year, among the strongest in Latin America, but has been losing momentum. In the fourth quarter of last year, the economy grew by only 1.1 percent year-on-year, down from 2.3 percent in the third quarter.
    Despite risks to growth, including a further slowdown in Brazil and a fall in commodity prices, the IMF expects Paraguay's economy to remain resilient, with growth this year projected at 2.9 percent and 3.25 percent in 2017.
    The exchange rate of Paraguay's guarani started depreciating in September 2014 and lost 20 percent against the U.S. dollar in 2015 before hitting a low of 5,967 to the dollar in late January. 
    But since the central bank's rate hike on Jan. 20, the guarani has bounced back and was trading at 5,609 to the dollar today for an appreciation of 3 percent this year.


Nigeria holds rate, to adopt greater flexibility in FX market

May 24, 2016 by CentralBankNews   Comments (0)

    Nigeria's central bank left its benchmark Monetary Policy Rate (MPR) unchanged at 12.0 percent, saying his was the "least risky option" at a time of stagflation when policy options are very limited.
    The Central Bank of Nigeria (CNB), which switched into a tightening mode in March this year when it raised its rate by 100 basis points, added that this decision needed "time to crystalize" although the balance of risks remain tilted against economic growth.
     A scarcity of foreign exchange has been hampering Nigerian businesses for months and while the central bank said there was no easy fix because the lack of supply boils down to low foreign exchange earnings -  linked to the low oil price and low investments - it acknowledged that it was time to start reforming the foreign exchange market.
    The bank's monetary policy committee voted unanimously to "adopt greater flexibility in exchange rate policy to restore the automatic adjustment properties of the exchange rate" and gave the bank's management the mandate to work out the method for achieving this flexibility and decide when a new framework would begin.
    Speculation has been rife in financial markets in recent months that the CBN would either devalue the naira or seek to create some stability in the foreign exchange market to narrow the gab between the official exchange rate, the interbank market and the black market, where the dollar currently sells for over 300 naira compared the official peg of 197.
    "In the Committee's opinion, the key issue remains how to increase the supply of foreign exchange to the economy," the central bank said, adding that a dynamic foreign exchange framework could still not replace the imperative to the economy to increase its stock of foreign exchange through enhanced export earnings, which means the investment climate must be improved.
    Nigeria's naira tumbled in the second half of 2014 in response to the fall in global crude oil prices and only started to stabilize in March 2015 following the imposition of foreign currency controls to preserve foreign reserves.
    Since March the central bank has adjusted its exchange rate peg several times and in the interbank market the naira was trading at a daily average of 197 between March 25 and May 13, the CBN said.
    "The Committee, therefore, remains committed to its mandate of maintaining a stable naira exchange rate," the bank said.
    Given its dependence on imports, the shortage of foreign exchange has helped fuel inflation, the central bank acknowledged, adding that headline inflation jumped to 13.72 percent in April from 12.77 percent in March while core inflation rose for the third month in a row to 13.35 percent.
    In addition to the shortage of foreign exchange, the CBN attributed rising inflationary pressures to an energy crises that led to a shortage of petroleum products, exchange rate pass-through from imported goods, a high cost of electricity, high transport costs, a drop in food output, high cost of inputs and low industrial output.
    Nigeria's economy contracted by 13.7 percent in the first quarter of this year from the fourth quarter of last year due energy shortages, scarce foreign exchange and depressed consumer demand, which means that businesses would not investment or even procure raw materials.
    On an annual basis, the economy shrank by 0.36 percent, down from growth of 2.11 percent in the previous quarter, for the first negative growth rate in many years, and 4.32 percentage point below the growth rate seen in the first quarter of 2015.
    Earlier this month Nigeria's government raised gasoline prices by 67 percent in an effort to reduce fuel subsidies and fuel shortage, and attract more suppliers and investment. Although Nigeria is Africa's largest crude oil producer, and the fifth highest exporter worldwide, it relies on imports to meet some 70 percent of its domestic needs.


    The Central Bank of Nigeria (CBN) issued the following statement:

"The Monetary Policy Committee met on 23rd and 24th May 2016 against a backdrop of challenging global and domestic economic and financial conditions. The Committee assessed the global and domestic macroeconomic and financial developments, the short-to medium-term prospects for the domestic economy and the outlook for the rest of the year. In attendance were 9 out of the 12 members.

International Economic Developments
The Committee noted with concern, the tapered growth and continued decline in global output since 2014. At an estimated 3.2 per cent, global output in 2016 was only 0.1 percentage point below the 3.1 per cent in the corresponding period of 2015. The sluggish global output was traced to weak fundamentals in both the advanced economies and Emerging Markets and Developing Economies (EMDEs), including increased volatility in global financial markets, sustained softness in commodity prices, sluggish global trade, resulting in persistent fragility, particularly in the EMDEs.

The United States (US) economy slowed to 0.5 per cent in Q1 2016, a
steep decline compared with the 1.4 per cent growth recorded in the last quarter of 2015. The deceleration in US growth was attributed to contraction in non-residential fixed investment and energy businesses, a strong dollar which harmed exports, slowdown in government spending and moderation in private consumption expenditure (PCE). Japan which is currently in deflation is projected to grow by 0.5 per cent in 2016, the same as in 2015, on the back of persistently weak aggregate demand. The Bank of Japan’s (BoJ) monthly asset purchase of ¥6.7 trillion (US$61.73 billion) resulted in the Bank holding about one-third of outstanding government bonds, while the economy remained largely intractable with a credit crunch, indicating that the programmme may have lost its steam. In response to the contraction in credit, BoJ since January 2016, adopted a negative interest rate policy.

Real GDP growth in the Euro area at 0.6 per cent in Q1, 2016 was a phenomenal improvement compared with the 0.3 per cent achieved in Q4 2015. The European Central Bank (ECB), at its meeting of 21st April, 2016 maintained the soft policy stance by holding its refinancing rate at 0.0 per cent, lending rate at 0.25 per cent and deposit rate at -0.4 per cent. The Bank also maintained its monthly asset purchase program of €80 billion (US$87.2 billion), hoping to further stimulate output growth and achieve its 2 per cent inflation target.

The Bank of England (BoE) also retained its monthly assets purchase programme, financed through the issuance of reserves at ₤375 billion (US$543.75 billion). At the end of its April 13, 2016 meeting, BoE retained its policy rate at 0.5 per cent, with a commitment to raise inflation to its 2.0 per cent long run path.

Weaknesses in major EMDEs, including low capital inflows, rising costs of funds and continuing geopolitical factors, have been identified as key constraints to growth. Adverse commodity prices continued to provide strong headwinds against growth, defining other economic and financial conditions in the EMDEs. Consequently, the IMF (WEO April 2016 Update) downgraded the 2016 growth forecast for this group of countries from 4.3 to 4.1 per cent.

Disruptions to oil supply in Canada, Nigeria and Kuwait and, demand spikes following expectations of a US interest rate hike and buildup of crude oil inventories, contributed to mild oil price recovery in April 2016. Inflation remains largely suppressed in the advanced countries but tepid consumption spending and vulnerabilities in the financial markets continue to hamper financial intermediation and growth. Consequently, the monetary policy stance in most advanced economies remained largely accommodative and most likely to be maintained throughout 2016. On the contrary, monetary policy in the EMDEs could continue to diverge substantially, reflecting the diversity of shocks confronting them.

Domestic Economic and Financial Developments
In the first quarter of 2016, the economy suffered from severe shocks related to energy shortages and price hikes, scarcity of foreign exchange and depressed consumer demand, among others. Consequently economic agents could not undertake new investments or procure needed raw materials. Shortage of foreign exchange arising from low crude oil prices manifested in low replacement levels for raw materials, other inputs as well as new investments. In addition, the energy crisis experienced in the first five months of the year, resulted in increased power outages and higher electricity tariffs, as well as fuel shortages; which led to factory closures in some cases. The prolonged budget impasse denied the economy the timely intervention of complementary fiscal policy to stimulate economic activity in the face of dwindling foreign capital inflows. Aggregate credit to the private sector remained highly tapered while credit to government grew beyond the programmed benchmark for the period. The Committee, however, noted that many of the prevailing conditions in the economy during the review period were outside the direct control of monetary policy, but hopes that the implementation of the 2016 Federal Budget, supported by relevant sectoral policies and easing supply shocks in energy and critical inputs, would provide the needed boost to the economy.

Against this backdrop, data from the National Bureau of Statistics (NBS) for May 2016, indicated that domestic output in Q1, 2016 contracted by 0.36 per cent, the first negative growth in many years. This represents a drop of

2.47 percentage points in output from the 2.11 per cent reported in the last quarter of 2015, and 4.32 percentage point lower than the 3.96 per cent recorded in the corresponding period of 2015. Aggregate output contracted in almost all sectors of the economy, with the non-oil sector declining by about 0.18 per cent in Q1 2016, compared with 3.14 per cent expansion in the preceding quarter. Only agriculture and trade grew by 0.68 per cent and 0.40 per cent, respectively, while Industry, Construction and Services recorded negative growth of -0.93, -0.26 and -0.08 percentage point, respectively.


The Committee noted a further increase in year-on-year headline inflation to 12.77 per cent and 13.72 percent in March and April 2016, respectively, from 11.38 per cent in February 2016. The increase in headline inflation in April reflected increases in both food and core components of inflation. Core inflation rose sharply for the third time in a row to 13.35 per cent in April from 12.17 per cent in March, 11.00 per cent in February and 8.80 per cent in January having stayed at 8.70 per cent for three consecutive months through December, 2015. Food inflation also rose to 13.19 per cent from 12.74 per cent in March, 11.35 per cent in February, 10.64 per cent in January and 10.59 per cent in December, 2015. The rising inflationary pressure continued to be traced to legacy factors including energy crisis reflected in incessant scarcity of refined petroleum products, exchange rate pass through from imported goods, high cost of electricity, high transport cost, reduction in food output, high cost of inputs and low industrial output.

The Committee observed that in an economy characterized by high import dependence, the shortage of foreign exchange provided some basis for price increases as currently being experienced. The Committee noted that the economy needed to aggressively earn and build up its stock of foreign reserves in order to avoid distortions when faced with severe shocks. The Committee further noted that the current inflation trend, being largely a product of structural rigidities and inadequate foreign exchange earnings would continue to be closely monitored, and in coordination with fiscal policy, with a view to addressing the underlying drivers of the upward price movements.

Monetary, Credit and Financial Markets Developments
Broad money supply (M2) grew by 3.49 per cent in April 2016, a 1.29 percentage growth from the March level of 2.20 per cent and compared with the 3.67 per cent in April 2015. When annualized, M2 grew by 10.47 per cent in April 2016 against the provisional growth benchmark of 10.98 per cent for 2016. Net domestic credit (NDC) grew by 7.87 per cent in the same period and annualized at 23.61 per cent. At this rate, the growth rate of NDC was above the provisional benchmark of 17.94 per cent for 2016. The development in NDC essentially reflected the significant growth in credit to government of 35.97 per cent in the month, annualized to 107.91 per cent. Credit to the private sector grew by 3.52 per cent in April 2016, which annualized to a growth of 10.56 per cent, below the benchmark growth of 13.28 per cent.

The Committee observed with concern, the continuous dismal performance of growth in credit to the private sector, noting that in spite of the Bank’s efforts, DMBs continued to direct credit largely to low employment elastic sectors of the economy, a phenomenon that had significantly contributed to the low performance of the economy.

Money market interest rates reflected the continuing liquidity surfeit in the banking system. Average inter-bank call rate, which stood at 4.50 per cent on 21st March 2016, closed at 8.67 per cent on March 18, 2016. Between March 25th and 14th April 2016, interbank call rate averaged 2.00 per cent. The Committee noted a decline in activity in the inter-bank market in the period under review, which was due to the payment of FAAC statutory allocations and the maturity of CBN securities.

The Committee also noted a further improvement in the equities segment of the capital market as the All-Share Index (ASI) rose by 3.34 per cent from 25,899.91 on March 24, 2016 to 26,763.86 on May 18, 2016. Similarly, Market Capitalization (MC) rose by 3.14 per cent from N8.91 trillion to N9.19 trillion during the same period. However, relative to end- December 2015, the indices declined by 6.56 per cent and 6.70 per cent, respectively. Globally, however, the equities markets were generally bearish.

External Sector Developments
The average naira exchange rate remained stable at the inter-bank segment of the foreign exchange market during the review period. The exchange rate at the interbank market opened at N197.00/US$ and closed at N197.00/US$, with a daily average of N197/US$ between March 25 and May 13, 2016. The Committee, therefore, remains committed to its mandate of maintaining a stable naira exchange rate. The MPC noted the level of activity in the autonomous foreign exchange market especially, following the deregulation of the downstream petroleum sector with attendant increased demand in the interbank market, thus further exerting pressure on the naira.

The Committee recalls that over the last two consecutive meetings, it had signaled the imperative of reform of the foreign exchange market. In the intervening period, the Committee interrogated the issues around the current foreign exchange market regime, tracing them to the low foreign exchange earnings of the economy. Consequently, in the Committee’s opinion, the key issue remains how to increase the supply of foreign exchange to the economy. The Committee observed that while the Bank has been working on a menu of options to ensure increased supply of foreign exchange, there was no easy and quick fix to the foreign exchange scarcity problem as supply remained essentially a function of exports and the investment climate.

The Committee is aware that a dynamic foreign exchange management framework that guarantees flexibility could not replace the imperative for the economy to increase its stock of foreign exchange through enhanced export earnings. Consequently, such a structure must evolve to provide basis for radically improved investment climate to attract new investments. The Committee recognizes the exchange rate as a very important macroeconomic variable, which must be earned by increased productive activity and exports, noting with satisfaction that the Bank had made very significant and satisfactory progress with the reforms framework.

The Committee was of the view that the current adverse global and domestic economic and financial conditions and the imperative imposed by the demand and supply shocks to the domestic economy and considering the express intensions of Government as enunciated in the 2016 budget, policy must respond appropriately as the market continues to demonstrate confidence in the Bank’s ability to deliver a credible foreign exchange market. Accordingly, the MPC decided that the Bank should embrace some level of flexibility in the foreign exchange market. Given the imperative for growth, the Management of the Bank has been given the mandate to work out the modalities for achieving the desired flexibility that is in the overall interest of the Nigerian economy and when the implementation of the new framework would begin.

The Committee’s Considerations
The Committee acknowledged the severely weakened macroeconomic environment, as reflected particularly in increased inflationary pressure, contraction in real output and rising unemployment. The Committee recalls that in July 2015, it had hinted on the possibility of the economy falling into recession unless appropriate complementary measures were taken by the monetary and fiscal authorities. Unfortunately the delayed passage of the 2016 budget constrained the much desired fiscal stimulus, thus edging the economy towards contractionary output. As a stop-gap measure, the Central Bank continued to deploy all the instruments within its control in the hope of keeping the economy afloat. The actions, however, proved insufficient to fully avert the impending economic contraction. With some of the conditions that led to the contraction in Q1, 2016 still largely unresolved, the weak outlook for growth which was signaled in July 2015 could extend to Q2. To this effect, today’s policy actions have to be predicated on a less optimistic outlook for the economy in the short term, given that, even after the delayed budgetary passage in May 2016, the initial monetary injection approved by the Federal Government may not impact the economy soon, as the processes involved in MDAs finalizing procurement contracts before the disbursement of funds may further delay the much needed financial stimulus to restart growth.

The Committee noted that the CBN had implemented accommodative monetary policy from July 2015, with the hope of achieving growth, up until March 2016, when the MPC switched into a tightening mode. However, while the underlying conditions necessitating tight monetary policy remained largely in place, sundry administrative measures implemented by the Bank and recent macroeconomic conditions on the back of the 2016 Budget are expected to significantly dictate a key policy preference in the dilemma now faced by monetary policy - stagflation. Given the current limited policy space, it is imperative to balance stability with growth stance while working on options that in the short term, are certain to isolate seasonal and transient factors fuelling the current price spiral.

Other than credit to government, growth in all monetary aggregates
remained largely below their indicative benchmarks, yet; headline inflation

spiked in April 2016, far above the upper limit of the policy reference band.
Inflation has continued to be driven mainly by supply side factors such as fuel scarcity, increase in tariff and deterioration in electricity supply, increase in the price of petrol, higher input costs as a result of scarcity of foreign exchange, persistent security challenges and exchange rate pass- through to domestic prices of import. While the Committee believed that the recent deregulation of the downstream sector of the petroleum sector was in the right direction and would lead to increased supply, the pass-through effect of prices to other products has to be factored in policy considerations. Mindful of the limitations of monetary policy in influencing structural imbalances in the economy, the Committee stressed the need for policy coordination with the fiscal authorities in order to effectively address the identified pressure points.

The Committee noted that the continued excess liquidity in the banking system was responsible for the low level of activity in the interbank market. This is in addition to contributing to the sustained pressure in the foreign exchange market. The Committee expressed hope that efficient implementation of the recently passed 2016 Federal Budget, especially; the capital expenditure portion, would help invigorate growth in the economy as business confidence rejuvenates.

The Committee expressed concern over sustained pressure in the foreign exchange market and the necessity of implementing reforms to engender greater flexibility of rate and transparency in the operation of the inter-bank foreign exchange market. Accordingly, the Committee noted that it was time to introduce greater flexibility in the management of the foreign exchange market. The Committee reaffirmed commitment towards maintenance of price stability and reiterated the need to reappraise the coordination mechanism between monetary and fiscal policy and initiate reforms, for the purpose of more efficient policy synchronization and management.

The Committee’s Decisions
The Committee, in its assessment of the relevant risk profiles, came to the conclusion that although, the balance of risks remains tilted against growth; previous decisions need time to crystalize. Consequently, in a period of stagflation, the policy options are very limited. To avoid complicating the conditions, the Committee decided on the least risky option to hold. The foreign exchange market framework, now ready, the MPC voted unanimously to adopt greater flexibility in exchange rate policy to restore the automatic adjustment properties of the exchange rate. Consequently, all 9 members voted to hold and introduce greater flexibility in managing the foreign exchange rate. The Bank would however, retain a small window for funding critical transactions. Details of operation of the market would be released by the Bank at an appropriate time.
In summary, the MPC voted to:

        (i)Retain the MPR at 12.00 per cent;
        (ii)  Retain the CRR at 22.50 per cent;
        (iii)  Retain the Liquidity Ratio at 30.00 per cent; and
        (iv)  Retain the Asymmetric Window at +200 and -500 basis points around the MPR
        (v) Introduce greater flexibility in the inter-bank foreign exchange market structure and to retain a small window for critical transactions. 


Goldman Sachs is using Chinese Wall as a Beard for Tesla Conflict of Interest (Video)

May 24, 2016 by EconMatters   Comments (0)

By EconMatters

This isn`t the first time Goldman Sachs has tried to hide behind the notion of a "Chinese Wall" in a defense against an apparent conflict of interests. It is theoretically possible that this analyst operated in a complete vacuum at Goldman Sachs, but how likely is this fact given how interconnected Investment Banking activities are these days?

We would have to believe that Goldman Sachs analyst Patrick Archambault is basically the most clueless, blind, deaf and mute employee who has no networking connections whatsoever at Goldman Sachs. Basically, persona non grata around the ole water cooler. Frankly, if he didn`t in fact know about this deal, he probably should be let go from the firm on that basis alone, how could he not be that clued in to the goings on within the firm? I mean seriously I bet secretaries at Goldman Sachs knew about this deal just by accident.

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Hungary cuts 15 bps but signals end to easing cycle

May 24, 2016 by CentralBankNews   Comments (0)

    Hungary's central bank cut its base rate by another 15 basis points to 0.90 percent but said it would maintain this rate "for an extended period" as it had now reached a level that "ensures the medium-term achievement of the inflation target and a corresponding degree of support to the economy."
    The National Bank of Hungary (MNB) has now cut its policy rate by 45 basis points this year following similar-size cuts in March and April.
    The rate cut was largely expected by economists and follows the central bank's statement in April about a "further slight reduction."
    Since July 2012, when it embarked on an easing cycle, the MNB has cut its key rate by 610 basis points, only interrupted by a pause between July 2014 and March 2015.
    The central bank said inflationary pressures in Hungary will remain moderate for an extended period as there is still a degree of unused capacity and inflation is first expected to approach the bank's 3.0 percent inflation target in the first half of 2018, as forecast in its March inflation report.
    However, the MNB added that recent wage data suggest that the risk of "excessively low level of inflation expectations has diminished" and the government's draft budget is expected to help close the output gap.
     The government, headed by Prime Minister Viktor Orban, is preparing to cut the Value-Added-Tax rate for some food, internet and restaurant services in 2017.
    Although Hungary's economy shrank by more than expected in the first quarter of this year, the central bank said this was largely due to one-off effects, such as a slower drawdown of funding from the European Union and temporary factory shutdowns.
    In contrast, retail sales continued to rise in March, the unemployment rate has fallen and economic growth is expected to "pick up notably in the second half of the year."
    In the first quarter of this year Hungary's Gross Domestic Product shrank by 0.8 percent from the fourth quarter of 2015 and on an annual basis it grew by only 0.9 percent compared with 3.2 percent in the fourth quarter of last year.
    Hungary's headline inflation rate rose to 0.2 percent in April from minus 0.2 percent in March and is forecasts to remain below the central bank's target in the next two years before approaching it in the first half of 2018.

    The National Bank of Hungary issued the following statement:

"At its meeting on 24 May 2016, the Monetary Council reviewed the latest economic and financial developments and voted on the following structure of central bank interest rates with effect from 25 May 2016:

Central bank interest rate  Previous interest rate (per cent) Change (basis points) New interest rate (per cent)
Central bank base rate 1,05 -15 0,90
Overnight collateralised lending rate 1,30 -15 1,15
Overnight deposit rate -0,05 No change -0,05

In the Council’s assessment, Hungarian economic growth will continue following a temporary pause. A degree of unused capacity remains in the economy, and therefore the domestic real economic environment continues to have a disinflationary impact. Inflation remains persistently below the Bank’s target.
The annual inflation rate and core inflation both rose in April 2016. The Bank’s measures of underlying inflation continued to indicate moderate inflationary environment in the economy. Persistently low global inflation is restraining the increase in domestic consumer price inflation. Domestic inflation expectations are at historically low levels. Whole-economy wage growth accelerated early this year, which in turn is likely to gradually raise core inflation through rising household consumption. Inflation remains below the 3 per cent target over the forecast period, and only approaches it in the first half of 2018.
The Hungarian economic output grew more moderately than expected in the first quarter of 2016 relative to a year earlier. GDP decreased compared with the end of the previous year, reflecting strong one-off effects. The slower drawdown of funding from the EU relative to recent years caused a sharp slowdown in construction output, while temporary factory shutdowns led to a fall in industrial production. By contrast, retail sales continued to expand further in March, and have on balance grown at a stable rate in recent months. Parallel to the rise in the employment rate, the unemployment rate continued to fall. Economic growth is likely to exhibit strongly contrasting developments during the year as a whole. The Council expects growth to pick up notably in the second half of the year following moderate dynamics in the first half. The unwinding of one-off factors, as well as steps taken by both the Bank and the Government to support growth result in the economy picking up again. On the whole, the Growth Supporting Programme, the expansion in home construction and the faster drawdown of EU transfers help maintain a growth rate of around 3 per cent.
Moderate growth early this year is expected to result in the output gap opening up temporarily; however, looking forward, the expansionary impact on demand of next year’s draft budget is likely to speed up the closure of the gap. Rising incomes and the pick-up in lending will contribute to the expansion in consumption, which in turn provides a considerable support to economic growth in the coming years.
Sentiment in global financial markets has deteriorated slightly since the Council’s latest interest rate-setting decision, mainly driven by weaker-than-expected macroeconomic data from the US and the euro area and news coming from oil markets. In line with a reduction in global risk appetite domestic long-term government bond yields have risen since the previous policy decision. Hungary’s strong external financing capacity and the resulting decline in external debt are contributing to the sustained reduction in the vulnerability of the economy. The international rating agency Fitch has upgraded Hungary’s long-term government debt rating to investment grade. This step is expected to contribute to further improvement in the risk assessment of the economy. In the Council’s assessment, a watchful approach to monetary policy is still warranted due to uncertainty in the global financial environment. Forward-looking money market real interest rates are in negative territory and are declining even further as inflation rises.
In the Council’s assessment, there continues to be a degree of unused capacity in the economy and inflationary pressures remain moderate for an extended period. The real economy has a disinflationary impact over the policy horizon. If the assumptions underlying the March Inflation Report projection hold, inflation is expected to approach the 3 per cent target in the first half of 2018.
Recent wage data suggest that the risk of second-round effects resulting from an excessively low level of inflation expectations has diminished. In addition, next year’s draft budget also leads to the closing of the output gap. In the Council’s assessment, with the current 15 basis point reduction the policy rate has reached the level of 0.9 per cent which ensures the medium-term achievement of the inflation target and a corresponding degree of support to the economy. The Council has left the overnight deposit rate unchanged at -0.05 per cent and lowered the overnight lending rate by 15 basis points to 1.15 per cent. Based on available information, the inflation outlook and the cyclical position of the real economy point to maintaining the 0.9 per cent base rate for an extended period.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 8 June 2016."

Turkey cuts lending rate 50 bps but maintains repo rate

May 24, 2016 by CentralBankNews   Comments (0)

    Turkey's central bank cut the upper band of its interest rate corridor for the third consecutive month in "a measured step toward simplification" of its rate structure but again left its benchmark repo rate steady at 7.50 percent as the "improvement in the underlying core inflation trend remains limited, necessitating the maintenance of a tight liquidity stance.
    The Central Bank of the Republic of Turkey (CBRT) cut the overnight marginal funding rate by another 50 basis points to 9.50 percent and the lending rate at its late liquidity window by 50 basis points to 11.0 percent.
    Since March the overnight funding rate has been cut by 125 basis points in response to what the CBRT described as a "marked decline" in inflation due to lower unprocessed food prices. The benchmark repo rate has been steady at 7.50 percent since February 2015.
    The central bank reiterated its recent guidance that "future monetary policy decisions will be conditional on the inflation outlook" and in light of inflation expectations, prices and other factors, a tight monetary policy stance will be maintained.
    Turkey's headline inflation rate eased to 6.57 percent in April from 7.46 percent in March while core inflation eased to 9.3 percent, down from 9.5 percent as both numbers remain well above the bank's target of 5.0 percent.
    In its latest inflation report, the CBRT maintained its outlook for inflation to reach 7.5 percent by the end of this year and 6 percent by the end of 2017, reaching 5 percent in 2018.
    In contrast to its statement in April, when the central bank said global volatility had declined, the central bank today said "global volatility has increased to some extent," and the tight monetary policy stance, cautious macroeconomic policies helped increase the economy's resilience to shocks.

    The Central Bank of the Republic of Turkey released the following statement:
Participating Committee Members

Murat Çetinkaya (Governor), Ahmet Faruk Aysan, Erkan Kilimci, Necati Şahin, Abdullah Yavaş, Mehmet Yörükoğlu. 
The Monetary Policy Committee (the Committee) has decided to set the short term interest rates as follows:
a) Overnight Interest Rates: Marginal Funding Rate has been reduced from 10 percent to 9.50 percent, and borrowing rate has been kept at 7.25 percent,
b) One-week repo rate has been kept at 7.5 percent,
c) Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate has been kept at 0 percent, and lending rate has been reduced from 11.50 percent to 11 percent.
Annual loan growth continues at reasonable rates in response to the tight monetary policy stance and macroprudential measures. The favorable developments in the terms of trade and the moderate course of consumer loans contribute to the improvement in the current account balance. While domestic demand continues to have a positive impact on growth, demand from the European Union economies continues to support exports. Accordingly economic activity displays a moderate and stable course of growth. The Committee assesses that the implementation of the structural reforms would contribute to the potential growth significantly.
Recently, the global volatility has increased to some extent. The Committee assesses that the tight monetary policy stance, the cautious macroprudential policies and the effective use of the policy instruments laid out in the road map published in August 2015 increase the resilience of the economy against shocks. In this respect, the Committee decided to take a measured step towards simplification.
Recently, inflation has displayed a marked decline, mainly due to unprocessed food prices. However, improvement in the underlying core inflation trend remains limited, necessitating the maintenance of a tight liquidity stance.
Future monetary policy decisions will be conditional on the inflation outlook. Taking into account inflation expectations, pricing behavior and the course of other factors affecting inflation, the tight monetary policy stance will be maintained.
It should be emphasized that any new data or information may lead the Committee to revise its stance.
The summary of the Monetary Policy Committee Meeting will be released within five working days."

Israel holds rate, sees higher risks to growth, exports fall

May 23, 2016 by CentralBankNews   Comments (0)

    Israel's central bank left its key policy rate steady at 0.10 percent, as expected, and said its policy stance will remain "accommodative for a considerable time," a guidance that has been reinforced by "the intensifying decline in exports in recent months," along with developments in global economic growth and inflation, domestic economic activity, the exchange rate and the monetary policy of major central banks.
    But the Bank of Israel (BOI) has clearly become more concerned over economic growth, noting the "worrying contraction in exports" and an increased risk to growth. Last month the BOI merely said the risks to growth "remain high."
    In April Israel's exports declined by an annual 11 percent to US$3.596 billion, the lowest since August 2009, while exports excluding diamonds and startup contracted by 12.9 percent. In addition, services exports have not grown in 1-1/2 years, the BOI said.
    Israel's Gross Domestic Product grew by an annual 1.7 percent in the first quarter of this year, down from 2.1 percent in the fourth quarter of last year, with private consumption continuing to lead growth with an increase of 4 percent.
    Israel remains mired in deflation, with consumer prices down by an annual 0.9 percent in April compared with March's fall of 0.7 percent and the BOI repeated its view from last month that risks to achieving its inflation target "remain high."
    The BOI repeated its recent phrase that it will "examine the need to use various tools to achieve its objectives of price stability," employment, growth and a stable financial system.
    Interest rate markets have remained unchanged, the BOI said, adding they don't show any change in BOI rates in the next year and private forecasters project that the policy rate will remain at its current level in coming months.
    In March the BOI, which has maintained its key rate since cutting it by 15 basis points in February last year,  said it expected inflation to turn around in the next few months and said it saw no need to follow other central banks and pursue various forms of extraordinary policy measures.
    The BOI's March forecast saw inflation averaging 0.2 percent by the fourth quarter of this year, then 0.8 percent by the first quarter of 2017 and 1.4 percent by end-2017, finally moving into the central bank's inflation target of 1-3 percent by the middle of 2017.
    Economic growth was forecast to expand 2.8 percent this year, up from 2015's 2.5 percent, and then by 3.0 percent in 2017.
    After depreciating sharply between August 2014 and March 2015, Israel's shekel has firmed but since the last BOI policy meeting on April 20, the shekel has weekend by 3 percent against the U.S. dollar. Over the preceding 12 moths, the shekel is up by 3.3 percent in terms of the nominal effective exchange rate.
   The shekel was quoted at 3.87 to the dollar today, largely unchanged since the start of the year.

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

"The decision to keep the interest rate for June 2016 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 of 1–3 percent a year, and to support growth while maintaining financial stability. The intensifying decline in exports in recent months reinforces the Monetary Committee’s assessment that in view of developments in the inflation environment, in growth in Israel and 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.
The following are the main considerations underlying the decision:
·     The inflation environment remains low, with diverse developments this month: the CPI for April increased, but by a lower rate than expected; expectations for various terms moved in different directions, though medium-term and long-term expectations continue to be anchored within the target range. 
·     The first estimate of National Accounts data indicates a worrying contraction in exports, after a prolonged virtual standstill, while private consumption, supported by the low interest rate and wage increases in the economy, continues to drive growth. In contrast, the picture conveyed by labor market data continues to be positive, and is reflected in a low level of unemployment, a high level of employment, wage increases, and a high job vacancy rate.
·     In global economic activity, weakness remains focused on emerging markets, and in the first quarter on the US and UK as well. The slowdown in the growth of world trade continues. The recovery in Europe remains fragile. Major central banks continued monetary accommodation, but did not enhance it, and the markets’ expected timing of an increase in the US federal funds rate was brought forward, after having been deferred in previous months.
·     From the monetary policy discussion on March 27, 2016, through April 19, 2016, the shekel weakened by 3 percent against the US dollar and by 1.6 percent in terms of the nominal effective exchange rate. Over the past 12 months there has been an appreciation of 3.3 percent in terms of the nominal effective exchange rate, and the exchange rate level continues to weigh on growth of exports and the tradable sector.
·     The rate of increase in home prices moderated slightly in recent months but remains high. The volume of new mortgages taken out also remains elevated, despite an increase in mortgage interest rates in recent months.
The Monetary Committee is of the opinion that the risks to achieving the inflation target remain high, and that the risks to growth have increased. 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 and will examine the need to use various tools 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.
The minutes of the monetary discussions prior to the interest rate decision for June 2016 will be published on June 6, 2016. 
The decision regarding the interest rate for July 2016 will be published at 16:00 on Monday, June 27, 2016."

Kenya cuts rate 100 bps as inflation seen in target range

May 23, 2016 by CentralBankNews   Comments (0)

    Kenya's central bank cut its Central Bank Rate (CBR) by 100 basis points to 10.50 percent, saying inflation is expected to decline and remain within the target range in the short term, which means "there was policy space for an easing of monetary policy while continuing to anchor inflation expectations."
    The Central Bank of Kenya (CBK), which raised its policy rate by 300 basis points in 2015 in response to a fall in the shilling's exchange rate and a rise in inflation, added that inflation data showed there were "no significant demand pressures in the economy" and the foreign exchange market had remained stable, supported by a narrower current account deficit.
    Earlier this month Patrick Njoroge was quoted as saying the central bank had room to start easing its policy as inflation was falling back within the target range of 2.5 percent to 7.5 percent.
   Kenya's consumer price inflation rate eased to 5.27 percent in April from 6.45 percent in March, with the 3-month annualized non-food-nonfuel inflation rate down to 4.6 percent in April from 6.8 percent in March.
    Since November last year, the shilling's exchange rate has remained relatively stable, with the central bank attributing this to a narrowing of the current account deficit on improved earnings from tea and horticulture exports, strong diaspora remittances and a lower bill for oil imports.
   The shilling was quoted at 100.9 to the U.S. dollar today, up 1.4 percent since the start of the year.
    Kenya's current account deficit was estimated at 6.8 percent of Gross Domestic Product in 2015, down 3 percentage points from 2014, and is expected to narrow further this year, the CBK said.
    Foreign exchange reserves at the central bank amounted to US$7.688 billion, up from $7.377 billion at the end of March.
    In March the International Monetary Fund approved a $1.5 billion precautionary arrangement and the CBK said this arrangement, together with its reserves, "will continue to provide adequate buffers against short-term shocks."

    The Central Bank of Kenya issued the following statement:

The Monetary Policy Committee (MPC) met on May 23, 2016, to review recent economic developments, and the outlook for the domestic and global economies. The Committee noted the following:
 Month-on-month overall inflation fell to 5.3 percent in April 2016, from 6.5 percent in March, and was within the Government’s target range. This decline was largely due to reduction in the prices of food items and fuel.
 Month-on-month non-food-nonfuel (NFNF) inflation also declined to 5.8 percent in April from 6.0 percent in March. The CPI category alcoholic beverages, tobacco and narcotics contributed 1.1 percentage points to NFNF inflation in April, reflecting the revised excise tax introduced in December 2015. Significantly, the 3-month annualised NFNF inflation fell from 6.8 percent in March to 4.6 percent in April, indicating that there were no significant demand pressures in the economy.
 The foreign exchange market has remained stable, supported by a narrower current account deficit due to lower oil imports, improved earnings from tea and horticulture exports, and strong diaspora remittances. The current account deficit was estimated at 6.8 percent of GDP in 2015, a reduction of 3 percentage points from 2014, and is expected to narrow further in 2016.
  Foreign exchange reserves of the Central Bank of Kenya (CBK) currently stand at USD7,688.3 million (equivalent to 5.0 months of import cover) up from USD7,377.2 million (equivalent to 4.7 months of import cover) at the end of March 2016. These reserves, together with the Precautionary Arrangements with the International Monetary Fund (IMF) will continue to provide adequate buffers against short-term shocks.
 The coordination between monetary and fiscal policies continues to support macroeconomic stability. The National Government budget deficit is expected to narrow in FY2015/16 thereby easing pressure on interest rates.
 The banking sector is resilient and has begun to stabilise following the successful and quick reopening of Chase Bank, which has enhanced confidence in the sector. Furthermore, the CBK’s enforcement of existing regulations particularly with respect to the classification of loans, has strengthened and increased transparency of the banking sector.
 The ratio of gross non-performing loans to gross loans was 8.2 percent in April 2016, partly reflecting better reporting standards. The CBK will continue to monitor credit and liquidity risks, which remain concerns.
 The performance of the economy remains strong, posting a growth of 5.6 percent in 2015, from 5.3 percent in 2014. The MPC Market Perception Survey conducted in May 2016, shows that the private sector remains optimistic supported by macroeconomic stability, stronger agriculture performance, public infrastructure investment, and tourism recovery.

 The outlook for global economy has deteriorated in recent months due to weaker growth prospects in advanced and emerging market economies. Uncertainties in the global financial markets have increased due to risks posed by, among other factors, slower growth in China, the timing of the U.S. Fed’s next increase in interest rates, and the outcome of the referendum on U.K. membership of the European Union (Brexit). However, the growth outlook for Kenya’s main trading partners in the region remains strong, suggesting better prospects for exports performance.

The Committee noted that overall inflation is expected to decline and remain within the Government target range in the short-term. Therefore, it concluded that there was policy space for an easing of monetary policy while continuing to anchor inflation expectations. The MPC therefore decided to lower the CBR by 100 basis points to 10.5 percent. The CBK will continue to monitor developments in the economy, and will use instruments at its disposal to maintain overall price and financial sector stability."


What Really Worries the Fed and Treasury About Japan Monetary Policy (Video)

May 23, 2016 by EconMatters   Comments (0)

By EconMatters

The US sure is concerned about further BOJ intervention, the real question is why now? What is really going on behind the scenes? We delve into some of the possibilities that we think are at play here behind the scenes at the Federal Reserve and the U.S. Treasury.

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Pakistan cuts rate 25 bps, low inflation in '16, higher '17

May 23, 2016 by CentralBankNews   Comments (0)

    Pakistan's central bank cut its policy rate by 25 basis points to 5.75 percent, saying inflation is expected to remain low in the current fiscal 2016 year and below the target of 6 percent despite a rising trend in the last seven months.
    The State Bank of Pakistan (SBP), which last year cut its rate by 300 basis points, added in a statement from May 21 that inflation in fiscal 2017, which begins July 1, would reach a "higher plateau" as demand was picking up, higher global oil prices will be passed on to consumer prices and higher taxes, electricity and gas tariffs, if realized, would put upward pressure on inflation.
    Pakistan's inflation rate rose to 4.17 percent in April from 3.94 percent in March and 1.61 percent in January with core inflation also following a rising trend, "indicating a buildup of underlying inflationary tendencies."
    Core inflation eased to 4.4 percent in April from 4.7 percent in March but was up from a recent low of 3.4 percent in October last year.
    In April the SBP forecast average inflation in FY16 of 3-4 percent.
    Economic growth in Pakistan in the current fiscal year is set to exceed the FY15 growth of 4.2 percent but below the target of 5.5 percent, the SBP said, adding the current account deficit was likely to shrink to the previous year's level of around 1 percent of Gross Domestic Product and foreign exchange reserves were projected to continue to rise.

    The State Bank of Pakistan issued the following statement:

"Towards the end of FY16, macroeconomic conditions continue to improve. Headline CPI inflation, despite its continuous increase on Year-on-Year (YoY) basis, would remain below its FY16 annual average target of 6 percent. Real GDP growth is set to exceed its FY15 outcome of 4.2 percent, while remaining below its target of 5.5 percent. Current account deficit is likely to shrink to the previous year’s level of around 1 percent of GDP and the expected surplus in balance of payments would be marginally less than the FY15 level. Foreign exchange reserves are still projected to maintain upward trajectory.

As expected, headline CPI inflation sustained its rising trend for the seventh consecutive month and on YoY basis rose to 4.2 percent in April 2016 from the low of 1.3 percent in September 2015. In addition to the seasonal impact of perishable food items and services, this increase owes to further waning of the base effect and second round impact of decline in oil prices. Similarly, core inflation measures have broadly followed a rising trend in this fiscal year indicating buildup of underlying inflationary tendencies. Despite these trends and developments, the inflation outlook for FY16 is low.

However, going into FY17 inflation is likely to attain a higher plateau.
Major sources that would determine this path are as follows. First, relatively faster pickup in demand compared to its gradually improving supply dynamics could lead inflation on a higher side. Second, rising global oil price along with modest recovery in non-energy commodity prices will pass on to the domestic consumer prices. Third, some risks, such as imposition of new taxation measures and increase in electricity and gas tariffs, if realized would put upward pressure on CPI inflation.

Expansion in industrial activities and services sector would salvage some of the lost momentum to GDP growth due to the losses from cotton and rice crops. Recovery in Large-scale Manufacturing, which grew by 4.7 percent during Jul-Mar FY16 compared to 2.8 percent in Jul-Mar FY15, is expected to continue further on account of improving energy and security conditions. At the same time, buoyant growth in construction and improved demand for consumer durables has persistently indicated revival in domestic demand in the current fiscal year. This is also reflected in uptake in credit to private sector which increased by Rs314.7 billion during Jul-Mar FY16 compared to Rs206.0 billion during the same period of FY15. Thus, GDP growth in FY16 is expected to provide the needed sustainability in growth trajectory and the basis for further improvement in FY17.

On the external front, stability in the balance of payments and upward trajectory in foreign exchange reserves mainly owes to a combination of favorable developments both in the current and financial accounts. Steady workers’ remittances and low oil prices have helped contain the current account deficits at manageable levels, while multilateral and bilateral inflows have largely contributed to the surpluses in the financial account.

In the current fiscal year as well, favorable trends in these factors are expected to yield an overall surplus in the balance of payments with SBP’s foreign exchange reserves estimated to increase to over 4 months of import coverage; up from around 3 months at end-FY15. Going forward, foreign direct investment is projected to increase as the work on projects under China Pakistan Economic Corridor gains momentum. On the other hand, owing to some anticipated uptick in commodity prices along with improvements in domestic energy supplies exports receipts are likely to recover marginally. However, with weaknesses in private capital inflows persisting for some time now, uncertainty may arise if there is an adverse change in oil price or workers’ remittances.

Monetary Policy Committee, after detailed deliberations, has decided to reduce the policy rate by 25 basis points from 6.0 percent to 5.75 percent."


This week in monetary policy: Israel, Kenya, Turkey, Hungary, Nigeria, Paraguay, Canada, Ukraine, Moldova, Fiji, Colombia and Trinidad & Tobago

May 22, 2016 by CentralBankNews   Comments (0)

    This week (May 23 through May 28) central banks from 12 countries or jurisdictions are scheduled to decide on monetary policy: Israel, Kenya, Turkey, Hungary, Nigeria, Paraguay, Canada, Ukraine, Moldova, Fiji, Colombia, and Trinidad and Tobago.
    Following table includes the name of the country, the date of the next policy decision, the current policy rate, the result of the last policy decision, the change in the policy rate year to date, the rate one year ago, and the country’s MSCI classification.
    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

MAY 23 - MAY 28, 2016:
COUNTRY       DATE           RATE      LATEST        YTD     1 YR AGO    MSCI
ISRAEL 23-May 0.10% 0 0 0.10%       DM
KENYA 23-May 11.50% 0 0 8.50%       FM
TURKEY 24-May 7.50% -25 0 7.50%       EM
HUNGARY 24-May 1.05% -15 -30 1.65%       EM
NIGERIA 24-May 12.00% 100 100 13.00%       FM
PARAGUAY 24-May 6.00% 0 25 6.25%
CANADA 25-May 0.50% 0 0 0.75%       DM
UKRAINE 26-May 19.00% -300 -300 30.00%       FM
MOLDOVA 26-May 15.00% -200 -450 14.50%
FIJI 26-May 0.50% 0 0 0.50%
COLOMBIA 27-May 7.00% 50 125 4.50%       EM
TRINIDAD & TOBAGO 27-May 4.75% 0 100 3.75%