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Central Bank News Link List - Nov 23, 2014 - China ready to cut rates again on fears of deflation - sources

November 23, 2014 by CentralBankNews   Comments (0)

Here's today's Central Bank News' link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don't miss any important news.

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Central Bank News Link List - Nov 21, 2014 - China cut reflecting domestic reasons carries global resonance

November 21, 2014 by CentralBankNews   Comments (0)

Here's today's Central Bank News' link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don't miss any important news.

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China cuts key rate 40 bps, deposit rate by 25 bps

November 21, 2014 by CentralBankNews   Comments (0)

    China's central bank cut its benchmark one-year lending rate by 40 basis points to 5.6 percent, the first rate cut since July 2012, along with the one-year deposit rate that was cut by 25 basis points to 2.75 percent.
    The People's Bank of China (PBOC) said in a statement that the new interest rates would take effect from Saturday, Nov. 22.
    The PBOC also continued the process of liberalizing interest rates, allowing banks to pay depositors up to 1.2 times the benchmark rate, up from 1.1 times.
     
 

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Central Bank News Link List - Nov 20, 2014 - Yellen gets that sinking feeling Greenspan once knew

November 21, 2014 by CentralBankNews   Comments (0)

Here's today's Central Bank News' link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don't miss any important news.

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South Africa holds rate on lower inflation, weak economy

November 20, 2014 by CentralBankNews   Comments (0)

    South Africa's central bank maintained its benchmark repurchase rate at 5.75 percent, as expected, due to the lower trajectory of inflation and weak state of the economy.
    But the South African Reserve Bank (SARB), which has raised its rate by 75 basis points so far this year, said it still believes that rates have to be raised over time and the "timing of future rate increases will be dependent on a range of factors, including the evolution of inflation expectations, the speed of normalization of monetary policy in the US and the state of the domestic economy."
    The outlook for inflation has improved since the central bank's previous meeting in September, with the risks roughly balanced and headline inflation is now forecast to average 6.1 percent this year, down from the previous forecast of 6.2 percent.
   For 2015 inflation is expected to average 5.3 percent, a sharp drop from the previous forecaster of 5.7 percent and for 2016 the forecast has been revised down to 5.5 percent from 5.8 percent, dropping to 5.4 percent in the final quarter of that year.
    However, given the elevated level of core inflation and that fact that inflation is expected to increase as the impact of lower oil prices dissipates, SARB said it remains vigilant.
    In October, South Africa's headline inflation rate was steady at 5.9 percent, just within the bank's target range of 3 to 6 percent.

   The South African Reserve Bank issued the following statement by its new governor, Lesetja Kganyago, who took over from Gill Marcus earlier this month.

   

"Issued by Lesetja Kganyago, Governor of the South African Reserve Bank
Since the previous meeting of the Monetary Policy Committee, the sharp decline in international oil prices has contributed to a more benign global inflation environment. This development may also ameliorate the deteriorating growth outlook in some regions by providing a boost to consumption expenditure. Lower oil prices have also had a favourable impact on domestic headline inflation, with the medium-term forecast improving relative to the previous forecast. However, the underlying inflation pressures, as reflected in core inflation, persist.

The domestic growth outlook remains challenging, but after two quarters dominated by the fall-out from extended strikes, some recovery is expected, but demand remains subdued. The coming quarters are expected to see an improved performance in the mining and manufacturing sectors, but the outlook is inhibited by domestic structural constraints, as well as by a weak global economy and the continued declining trend in non-oil commodity prices. Growth next year is expected to remain weak.

The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas measured 5,9 per cent in both September and October, having measured 6,4 per cent in August. Downward pressure on inflation in October came from continued moderation in food and petrol prices. Food price inflation continued its downward trend, measuring 8,0 per cent in October, down from 8,7 per cent previously, while petrol prices increased by 2,4 per cent. Core inflation, which excludes food, petrol and electricity, moderated to 5,6 per cent in September from 5,8 per cent in August, but measured 5,7 in October, reflecting primarily continued exchange rate pass-through to some goods categories.
Administered price inflation excluding petrol measured 6,4 per cent in October, down from 6,5 per cent in September. Headline producer price inflation for final manufactured goods, which reached a recent high of 8,8 per cent in April, measured 7,2 per cent and 6,9 per cent in August and September respectively, driven in part by lower food and fuel price inflation.

The Bank’s forecast of headline inflation has improved since the previous meeting of the MPC, mainly due to the impact of declining international oil prices. Having reached a peak of 6,5 per cent in the second quarter of this year, inflation is now expected to average 5,9 per cent in the final quarter of 2014, and average 6,1 per cent for the year, compared with 6,2 per cent previously. The downward trend is expected to continue into next year, with inflation forecast to reach a low of 5,1 per cent in the second quarter, and to average 5,3 per cent for the year, compared with 5,7 per cent previously. The forecast for 2016 has been revised down from 5,8 per cent to 5,5 per cent, and is expected to measure 5,4 per cent in the final quarter of the year.

The forecast for core inflation, by contrast, is more or less unchanged at an average 5,6 per cent and 5,7 per cent in 2014 and 2015 respectively, reaching a peak of 5,9 per cent in the first quarter of 2015 (previously 5,8 per cent), and moderating to 5,3 per cent in 2016, down from 5,5 per cent previously. The MPC assesses the risk to the headline inflation forecast to be broadly balanced.
The results of the fourth quarter inflation expectations survey of the BER will only be released in December. Market-based surveys, as reflected in the Reuters Econometer survey, however, show that the median CPI inflation expectation of analysts has remained unchanged over the past two months at 5,7 per cent and 5,5 per cent for 2015 and 2016 respectively. Break-even inflation rates (the yield differential between conventional government bonds and inflation linked bonds) declined since the previous meeting and reflect expectations within the target range for 5 year maturities, and marginally above the upper limit of the inflation target range at 10 year maturities.

The US and the UK remain the main drivers of global growth although more broadly, global growth may get some impetus from lower oil and food prices, which should provide some boost to consumers. US economic growth was better than expected in the third quarter, with the first advanced estimate of 3,5 per cent, and the unemployment rate declining to 5,8 per cent, the lowest level since June 2008. The UK recorded growth of 2,8 per cent in the third quarter, while the unemployment rate was unchanged at 6,0 per cent. The Japanese economy contracted for a second consecutive quarter during the third quarter, and has prompted a reconsideration of a further VAT increase next year. The response to the further additional monetary stimulus announced recently remains uncertain amid a tighter fiscal policy stance. The Eurozone outlook also remains bleak, including in the core countries such as France and Germany, although lower food and oil prices, coupled with further monetary easing may have a positive impact.

The outlook for emerging markets is mixed, with emerging Asian economies expected to benefit most from the positive spillovers from the US recovery. This is expected to offset in part the adverse impact of the slowdown in China, where growth is expected to be lower than in the past few years, as the economy rebalances away from investment towards consumption. This moderation is expected to continue to impact negatively on commodity prices. The Indian economy is showing signs of sustained recovery, while the other Brics partners, Russia and Brazil, face significant growth headwinds. Oil exporters generally are expected to face challenges from international oil price weakness.

Global inflation is expected to moderate in the face of benign food price inflation and falling international oil and other commodity prices. While this is welcome in the higher inflation regions, particularly emerging markets, it does aggravate deflationary risks in some of the advanced economies, particularly in the Eurozone and Japan. Monetary policy stances are expected to remain ultra-loose in these two regions, with a significant stimulus package announced recently in Japan and the ECB is anticipated to conduct further asset purchases. The US Fed has ended its programme of quantitative easing, but at this stage it is not contracting its balance sheet and proceeds from maturing assets are being reinvested. Although the general expectation is that the US Fed will begin raising interest rates in mid-2015, there are also some expectations that the more benign inflation outlook could delay this. Forward guidance from both the Bank of England and the US Fed is that any adjustment is likely to be gradual, and policy rates may be lower than their estimated long run normal rates for some time despite the improved growth outlooks. Since the previous meeting of the MPC, policy rates have increased in Brazil, Russia and Indonesia, but reduced in Sweden, South Korea, Chile and Poland.

The exchange rate of the rand has been relatively volatile since the previous meeting, in response to external and domestic factors including changing expectations of the timing of the first US interest rate increase as well as the downgrade of South Africa’s credit rating by Moody’s Investor Service. Although the rand initially weakened sharply against the US dollar, at one stage reaching a level of R11,36 against the US dollar, this move has since largely been reversed. Since the previous meeting of the MPC, the rand has depreciated marginally against the US dollar, but appreciated by 2,1 per cent and 3,5 per cent against the euro and sterling respectively, and by 1,8 per cent on a trade weighted basis.

The rand is expected to remain susceptible to sudden shifts in sentiment regarding changes in monetary policy stances in the advanced economies, and the continued uncertainty regarding the extent to which US normalisation is already priced in to the exchange rate. The asynchronous nature of advanced economy monetary policies is expected to complicate the outlook and outcomes. However, the rand is likely to remain more sensitive to changes in financial conditions in the US than in Japan and the Eurozone. The persistently slow adjustment of the current account deficit also makes the rand vulnerable to swings in sentiment that raise concerns about the financing of this deficit. Although the lower oil prices should reduce the oil import bill, its positive impact on the deficit may be limited by further declines in other commodity prices.

The volatility in portfolio capital flows is indicative of fickle global investor sentiment. Net bond sales by non-residents amounted to R12,6 bn in September and R2,1 bn in October and a further R1,5 bn to date in November. In the equities market, having been marginal net sellers in September, non-residents were net buyers to the value of R5,7 bn in October but net sellers of R6,3 bn to date.

The domestic growth outlook remains subdued. Although an improved growth outcome is expected in the third quarter, following the 0,6 per cent growth in the second quarter, this is off a low base following prolonged strikes in the mining and manufacturing sectors. The Bank’s forecast for GDP growth in 2014 has declined marginally from 1,5 per cent to 1,4 per cent, and forecasts for 2015 and 2016 have been revised down from 2,8 per cent and 3,1 per cent to 2,5 per cent and 2,9 per cent respectively. This restrained outlook is consistent with the Bank’s composite leading indicator of economic activity which continues to trend sideways, with a slight upward move recently. The RMB/BER business confidence index improved in the third quarter, but at 46 index points, remains below the neutral level of 50.

The mining sector appears to be recovering to some extent from the strike-affected first half of the year, and is expected to contribute positively to third quarter growth, following two consecutive quarters of contraction. The physical volume of mining production increased by 0,7 per cent in the third quarter compared with the second quarter, and further increases can be expected in the final quarter, as platinum output is still below pre-strike levels. By contrast, although the physical volume of manufacturing production increased in September, the month-long strike in the steel and engineering industry in July contributed to a quarter-to-quarter contraction of 1,3 per cent in the third quarter. Sentiment indicators suggest that the outlook for the sector remains bleak, with the manufacturing confidence index still at very low levels and capacity utilisation rates back at 2011 levels. More positively, the Kagiso PMI edged above 50 index points in October for the first time since March, driven mainly by the inventory and new sales orders sub-indices.

The outlook for the construction sector is more positive, with the real value of building plans passed increasing for the fourth successive month in August. On a three-month-to-three-month basis, an increase of 9,8 per cent was recorded. However, while the various building confidence indices have generally improved, they remain below the neutral level.
The weak pace of economic growth is mirrored in the unemployment rate, which, according to the Quarterly Labour Force Survey of Statistics South Africa measured 25,4 per cent in the third quarter, compared with 24,5 per cent a year earlier. Total employment increased at a year-on-year rate of 0,5 per cent in the quarter. At the same time the number of discouraged workers increased sharply, by almost 100,000, and now total 2,5 million.

Consumption expenditure by households has remained relatively subdued, but there are signs of a moderate increase in the quarterly growth rate, as the negative effects of the protracted strikes on consumption dissipate. Consumption expenditure could be positively impacted by lower petrol prices. Although retail sales growth declined by 0,8 per cent (non annualised) in September, quarter-to-quarter growth of 0,9 percent was recorded in the third quarter, and 2,3 per cent year-on-year. Similarly, wholesale trade sales contracted in the third quarter, but increased by 5,9 per cent on a year-on-year basis. Motor vehicle sales have also shown some signs of recovery, although domestic sales are expected to be lower this year than in 2013. Retail sector confidence improved, with the BER reporting retailer confidence above the neutral level for the first time in two and a half years. Consumer confidence, however, declined significantly in the third quarter following an unexpected increase in the second quarter.

Trends in bank credit extension to the private sector have remained characterised by declining growth in advances to households, while advances to corporates have been buoyant. Total loans and advances grew at a twelve month rate of 8,8 per cent in September, but excluding mortgages the growth rate was 13,5 per cent, compared with a recent high of 18,6 per cent in December 2012. Credit extension to the household sector grew by 3,7 per cent in September, as unsecured lending remained weak despite a reversal of the negative growth trend in the month, but credit to the corporate sector grew by 15,3 per cent. Twelve-month growth in mortgage advances to households remained at levels below 3 per cent, while instalment sale credit and leasing finance continued its downward trend, with growth of 6,9 per cent. These trends are likely to constrain consumer demand in the coming months.

According to the October Medium Term Budget Policy Statement, government remains committed to its policy of fiscal consolidation, in order to prevent an increase in the debt ratio to unsustainable levels. The fiscal deficit is expected to decline from a projected 4,7 per cent of GDP in the current fiscal year to 3,0 per cent in 2017/18.

This is expected to be achieved through adherence to a nominal expenditure growth ceiling, and increased tax revenues. The ability to achieve the nominal expenditure targets will be determined to an important degree by the public sector wage settlement.
Wage trends remain broadly unchanged since the previous meeting of the MPC. According to Andrew Levy Employment publications, wage settlement rates averaged 8,0 per cent in the first nine months of the year. Nominal remuneration per worker as well as productivity trends in the formal non-agricultural sector were distorted by the significant increase in temporary employees by the Independent Electoral Commission, which contributed to the decline in the year-on-year increase in remuneration from 6,3 per cent to 3,5 per cent, while productivity declined by 1,6 per cent. The net result was a marginal increase in unit labour costs of 5,2 per cent in the second quarter, from 5,1 per cent previously.

Food price inflation remains a major driver of inflation, but is expected to continue to moderate in the coming months. Food price inflation appears to have peaked at 9,5 per cent in August, and has since moderated to 8,0 per cent in October, as lower producer prices of crops and cereals, which declined by 6,3 per cent in September, are beginning to have an impact at the consumer price level. Restocking of herds following the drought last year, however, has kept meat price inflation elevated. Food price pressures also remain benign at the global level, with the Food and Agricultural Organisation international food price index declining for seven consecutive months to its lowest level since August 2010.
International oil prices have declined markedly since their recent peak in June of around US$115 per barrel to current levels of below US$80 per barrel. This decline reflects a combination of factors, including increased supply coming from the US and Libya, moderating demand from China in particular, and changes in the internal dynamics within the OPEC cartel. The general expectation in the market is that these lower prices could persist for some time. Although some of the advantage of lower international oil prices has been offset to some extent by a weaker rand exchange rate, domestic petrol prices have declined by a cumulative R1,17 per litre since August, and should current trends continue, a further decline of around 70 cents per litre can be expected in December.

The marked decline in international oil prices has had a significant impact on the medium term outlook for headline inflation in the global economy and in South Africa. At this stage it is unclear whether this is a temporary shock, or if it will be sustained or decline further. As with an oil price increase, we would look through the impact effect and focus on the possible second round effects of this decline. The possibility that oil prices are sustained at current levels introduces a degree of downside risk to the inflation forecast.

The domestic growth outlook remains challenging, and the risks to the forecast are assessed to be moderately on the downside. The MPC does not see significant signs of excess demand pressures that are impacting on the inflation outlook and household consumption expenditure is expected to remain constrained.
At the same time, despite its recent relative stability, the exchange rate remains an upside risk to the inflation outlook, vulnerable to changing perceptions of the timing of global monetary policy adjustments, and the slow pace of contraction in the current account deficit. The extent to which policy normalisation is already priced into the exchange rate is also unclear.
A further upside risk to the inflation forecast comes from a possible increase in wage settlement rates in excess of inflation and productivity growth in the coming year.
In light of this assessment, the MPC sees the overall risk to the headline inflation forecast to be more or less balanced. However, given the elevated level of core inflation, and the fact that headline inflation is expected to increase later in the forecast period as the first round effect of the oil price decline dissipates, the Committee remains vigilant and will continue to monitor developments closely.

The Committee remains of the view that interest rates will have to normalise over time. However, given the lower trajectory of headline inflation and the continued weak state of the economy, the MPC has unanimously decided to keep the repurchase rate unchanged at 5,75 per cent per annum at this stage.

The timing of future interest rate increases will be dependent on a range of factors, including the evolution of inflation expectations, the speed of normalisation of monetary policy in the US and the state of the domestic economy." 

   www.CentralBankNews.info

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Turkey holds rates, tight stance until inflation improves

November 20, 2014 by CentralBankNews   Comments (0)

    Turkey's central bank kept its policy rates steady, including the benchmark repo rate at 8.25 percent, and confirmed its guidance that the "tight monetary policy stance will be maintained, by keeping a flat yield curve, until there is a significant improvement in the inflation outlook."
    But the Central Bank of the Republic of Turkey (CBRT), which raised its repo rate in January by 550 basis points and then cut it by 175 points from May through July, turned slightly more optimistic about the outlook, saying the contribution of domestic demand to growth was increasing and the moderate course of consumer loans and favorable terms of trade may help reduce the current account deficit.
   As in previous months, the CBRT said elevated food prices continued to delay an improvement in the outlook for inflation though lower commodity prices, in particular falling oil prices were expected to contribute to push down inflation next year, in line with the latest quarterly forecast.
    On Oct. 31, the central bank forecast that inflation in 2015 would decline to a midpoint of 6.1 percent, based on a range 4.6 percent and 7.6 percent, from a midpoint of 8.9 percent at the end of this year and then stabilize at the bank's 5.0 percent target in the medium term.
    Headline inflation rose slightly to 8.96 percent in October from 8.86 percent in September.

    The Central Bank of the Republic of Turkey issued the following statement:

"Participating Committee Members

Erdem Başçı (Governor), Ahmet Faruk Aysan, Murat Çetinkaya, Necati Şahin,  Abdullah Yavaş, Mehmet Yörükoğlu. 
The Monetary Policy Committee (the Committee) has decided to keep the short term interest rates constant at the following levels:
a) Overnight Interest Rates: Marginal Funding Rate at 11.25 percent, the interest rate on borrowing facilities provided for primary dealers via repo transactions at 10.75 percent, and borrowing rate at 7.5 percent,
b) One-week repo rate at 8.25 percent,
c) Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate at 0 percent, and lending rate at 12.75 percent.
Loan growth continues at reasonable levels in response to the tight monetary policy stance and macroprudential measures. Global demand remains weak, while the contribution of domestic demand to growth is increasing. However, the moderate course of consumer loans and the favorable terms of trade may contribute to the improvement in the current account balance.
Macroprudential measures taken at the beginning of the year and the tight monetary policy stance continue to have a favorable impact on the core inflation trend. However, elevated food prices delay the improvement in the inflation outlook. Meanwhile, current levels of commodity prices, in particular declining oil prices, are expected to contribute to disinflation foreseen for the next year. The Committee anticipates that, under the current monetary policy stance, inflation will decline in line with the forecast presented in the Inflation Report throughout 2015. 
Inflation expectations, pricing behavior and other factors that affect inflation will be closely monitored and the tight monetary policy stance will be maintained, by keeping a flat yield curve, until there is a significant improvement in the inflation outlook.
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."


    www.CentralBankNews.info

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Zambia raises rate 50 bps, sees elevated inflation into '15

November 19, 2014 by CentralBankNews   Comments (0)

    Zambia's central bank raised its policy rate by 50 basis points to 12.50 percent to "ensure the leveling off of inflation pressures over the third quarter is consolidated into lower inflation in 2015."
    The Bank of Zambia, which has now raised its rate by 275 basis points this year, said inflation is forecast to remain at these elevated levels throughout the rest of this year and into 2015, above the inflation target of 7.0 percent set by the finance minister for end-December 2015.
    Zambia's headline inflation rate rose to 7.9 percent in October from 7.8 percent in September.

    The Bank of Zambia issued the following statement:

"The Monetary Policy Committee (MPC) met yesterday, 18th November 2014, to consider developments in the domestic economy over the third quarter of 2014. In its deliberations, the MPC also considered global economic developments and their likely ramifications on the Central Bank’s ability to achieve its core objective of maintaining price stability.


GLOBAL ECONOMIC DEVELOPMENTS
The prospects for global growth have worsened since the August MPC meeting, with repercussions on commodity prices and global financial flows. In October the International Monetary Fund downgraded its growth forecasts for 2014 from 3.7% to 3.3%, with global growth in 2015 forecast to remain subdued. The United States of America and the United Kingdom continued to show firm progress in their recovery from the global financial crisis, but growth in the developing economies and emerging markets is forecast to slow down in 2014. Growth in Sub-Saharan Africa is, however, expected to remain robust. The risks to the global economy include rising geopolitical risks in Eastern Europe and the Middle East, deflation in the advanced economies and slow growth, particularly in the euro area.
Reflecting these global trends commodity prices fell over the third quarter, a trend that has been maintained in October and November 2014. Average crude oil prices declined to US $100.4 per barrel from US $106.3 per barrel in the second quarter. In October, average crude oil prices fell further and are currently below US $80 per barrel. Average copper prices rose to US $6,996 per metric tonne in the third quarter from US $6,795 per metric tonne in the second quarter. However, in October and November, copper prices have fallen back to levels seen in the second quarter of the year. The uneven pace of growth in the advanced economies and rising geopolitical risks have also contributed to the strengthening of the US Dollar and concomitant financial flows from emerging and frontier markets. These financial flows have led to greater exchange rate pressures in emerging and frontier markets, including Zambia.

MONETARY POLICY
Having tightened monetary policy significantly during the second quarter, the Bank of Zambia maintained the policy rate at 12% during the third quarter as inflation remained elevated at an average annual rate of 7.9% for the quarter. As a consequence of tightening of monetary policy, short term interest rates were misaligned with the overnight interbank rate rising significantly above the policy rate corridor. The Bank of Zambia, therefore, eased liquidity conditions through open market operations, in order to bring the overnight interbank interest rate back within the policy corridor of plus or minus 2 percentage points of the policy rate.

INFLATION
Inflationary pressures stabilized over the third quarter with annual inflation falling to 7.8% in September from 7.9% in June 2014. This drop in annual inflation was attributable to the decline in annual food inflation which fell to 6.9% in September from 7.8% recorded in June 2014 reflecting improved food supply. However, food inflation remained elevated when compared to the corresponding period in 2013, when it measured 6.5%. Annual non-food inflation in September rose to 8.8% from 8.0% in June, after having risen to a high of 9.2% in July. As was indicated in the discussion of inflation risks going forward in the August MPC statement, the rise in non-food inflation reflected the pass through to general prices of the sharp depreciation in the exchange rate, and the upward adjustments in electricity and fuel prices during the second and third quarter of the year, respectively. In October 2014, the annual inflation rate remained elevated at 7.9%.

DOMESTIC MONEY MARKET AND GOVERNMENT SECURITIES
Money market liquidity eased during the third quarter, after a significant tightening during the second quarter of the year. This primarily reflected BoZ short-term lending through open market operations (OMO), and was assisted by net Government spending and maturing investments in Government securities. As a result, the overnight interbank rate fell to 12.4% at the end of September from 25.2% at the end of June and has remained at this level in October and November 2014.
In the government securities market, there was a significant improvement in demand for Treasury-bills during the third quarter, particularly from foreign investors with the subscription rate improving to 122.5% from 56.3% in the second quarter. However, although the subscription rate on Government bonds also improved to 91.9% in the third quarter from 71.7% in the second quarter, they remained undersubscribed reflecting the preference for shorter dated securities by investors. The improvements in the subscription rates for Government securities saw the weighted average Treasury bill yield rate decline to 18.5% at the end of the third quarter from 19.4% at the end of the second quarter. However, the yield rate on Government bonds trended upwards, with the weighted average bond yield rate rising to 18.9% at end-September from 18.1% at end-June 2014.
At the end of September, the outstanding stock of Government securities registered a modest increase of 1.4% to K21.1 billion compared with K20.5 billion at end-June, 2014. Treasury bills accounted for 49.8% of outstanding Government securities, whilst Government bonds account for 50.2%. Foreign investors were a source of increased liquidity in the Government securities and their holdings of Treasury bills and Government bonds rose to K2.85 billion from K2.36 billion at end-June, 2014. This was equivalent to 13.7% of outstanding government securities.

The renewed interest of non-residents in the economy was also reflected in the capital market. The Lusaka Stock Exchange (LuSE) registered an increase in market capitalization of 1% and an increase in the All Share Index of 1.8%. In terms of non-resident participation, LuSE recorded a net inflow of foreign portfolio investment of US $17.4 million, compared to a net outflow of US $12.8 million witnessed during the second quarter of the year, with a total of US $19.1 million worth of stocks bought against sales of US $1.7 million.

DOMESTIC CREDIT AND INTEREST RATES
The growth in both domestic credit and broad money rebounded during the third quarter, after registering sharp declines during the second quarter of the year following the tightening in monetary policy. This reflected the easing in liquidity conditions by BoZ as well as some pick up in Government spending. Domestic credit rose by 14.8% to K28.5 billion from K24.8 billion in June. This was mainly due to the 68.9% and 7.4% rise in lending to Government and households, respectively. Credit to public enterprises fell, however, by 21%. On an annual basis domestic credit grew by 10.9% at end-September compared to a decline of 5.1% in June 2014.
At end-September commercial bank loans and advances had actually increased by 1.2% compared to a decline of 1.5% in the second quarter. With respect to the overall composition of credit, households continued to account for the largest share of outstanding credit at 34.3% followed by agriculture (17%), manufacturing (11.7%), wholesale and retail trade (8.8%), and mining and quarrying (6.2%).
Broad money increased by 2.9% to K33.6 billion in September 2014 from K32.7 billion in June 2014, a reversal of the 2.2% decline witnessed in the second quarter of the year. The growth in broad money was driven by a 20.6% increase in net domestic assets following a 68.9% rise in lending to Government. Net foreign assets on the other hand fell by 6.7% mainly due to the decline in net international reserves. On an annual basis, broad money growth stood at 16.1% at the end of the third quarter.
Commercial banks’ average lending rate remained unchanged at 19.3% in September 2014. However, the commercial banks’ average savings rate for amounts above K100 and the average 30-day deposit rate for amounts exceeding K20,000 edged upwards to 3.6% and 6.7% from 3.5% and 6.6%, respectively. Real interest rates remain high, with the real average lending rate rising to 11.5% whilst the real savings rate for amounts exceeding K20,000 remained negative at negative 1.1%.

FOREIGN EXCHANGE MARKET AND THE EXTERNAL SECTOR

During the third quarter, the foreign exchange market was characterised by lower volatility and the Kwacha appreciated against most of its major trading partner currencies and remained relatively flat against the US dollar. This was in contrast to the instability that characterised the second quarter of the year. Important drivers of the stability were, however, the measures taken by the central bank to reduce Kwacha liquidity in the money market. The Kwacha closed the quarter at K6.26 per US Dollar approximately the same level as at the end of the second quarter. Against the British Pound, the South African Rand and the Euro, the Kwacha appreciated by 4.8%, 5.7% and 7.3%, respectively. The overall supply of foreign exchange improved with steady supply witnessed from foreign corporates and the mining companies. In keeping with its commitment to manage excess volatility, the Bank of Zambia bought US $85 million and sold US $69.1 million during the third quarter. In real terms, the exchange rate as measured by the real effective exchange rate index, appreciated by 7.4% with the index moving to 98.1 in September from 105.8 in June.

External sector performance deteriorated during the third quarter, with the overall balance of Payments recording a deficit of US $123.2 million, compared to a surplus of US $740 million during the second quarter of the year. This largely reflected an unfavorable performance in the capital and financial account. The performance of the current account was also unfavourable with the deficit widening to US $22.3 million from US $21.9 million in the second quarter of the year. Zambia’s trade balance rose by 0.5% to US $343.6 million over the third quarter when compared to the second quarter. Merchandise export earnings grew by 4.5%, largely driven by higher copper export earnings. However, non-traditional export earnings fell by 3.4% reflecting the decline in export products such as: cement and lime; machinery and appliances; raw hides and skins; sulphur; gemstones; fresh fruits and vegetables; wheat; and fresh flowers.

FISCAL POLICY
Preliminary data suggest that for the third quarter the fiscal deficit, at approximately 0.9% of projected GDP for 2014, remained within the programmed target for the year, largely reflecting Government efforts to contain expenditures. Total revenues and grants at approximately 4.7% of projected GDP were 3.4% lower than the programmed target as a result of lower than programmed grant disbursements, coupled with lower non-tax revenues. Notwithstanding the above, tax revenues were 10.7% higher than programmed , reflected in the better than projected performance of domestic taxes, notably domestic Value added Tax (V.A.T). Total expenditures at approximately 6.1% of prospective GDP were 10.8% lower than the programmed level, with lower than programmed spending on non-financial assets, use of goods and services, as well as social benefits.

INDICATORS OF ECONOMIC ACTIVITY
Selected economic indicators tracked by BoZ continue to suggest that the real GDP growth target of 6.5% for 2014 is likely to be achieved. In the agriculture sector, the stock of maize grain held by the Food Reserve Agency (FRA) rose by 276.7% to 1,294,213 metric tonnes at end- September from 343,581.3 metric tonnes at end-June 2014. Rice stocks also rose by 37.6% to 2,097 metric tonnes. This reflected the domestic purchases by the FRA which, for maize, were higher than the 500,000 metric tonnes allocated in the 2014 Budget. In the construction sector, the production of cement increased by 29.2% to 401,104 metric tonnes from 310,383.3 metric tonnes during the second quarter. With respect to the energy sector, electricity generation increased by 1.3% in the third quarter to 3,554,249 Megawatt hours and on a year to date basis, electricity generation at 10,027,044 Megawatt hours, was also 4.4% higher during the same period in 2013. In the tourism sector, international passenger arrivals at the four international airports increased by 10.3% in the third quarter to 175,265. In the manufacturing sector production of clear beer and soft drinks rose by 20.8% and 2.6% respectively in the third quarter whilst the production of mineral water declined by 7.5%. However, on a year-to-date basis whilst the production of clear beer fell by 0.9%, the production of soft drinks and packaged mineral water rose by 29.1% and 35.3%, respectively. Preliminary data indicate that mining sector output might be lower than originally forecast at the beginning of the year, although the prospects for increased mining sector output over the medium term remain strong as new projects come on stream.

THE BANK OF ZAMBIA POLICY RATE
Inflation remains elevated at the current level of 7.9% in October, 2014. Our forecasts are that inflation will remain at these elevated levels throughout the rest of the year and into 2015. This is above the inflation target of 7% for end-December 2015 announced by the Hon. Minister of Finance in the 2015 Budget Speech.
Over the third quarter and into the fourth quarter there has been a material deterioration in the external sector relative to conditions existing in August, when the MPC held its last meeting. This has adversely impacted the domestic economy and is compounded by the more recent declines in the price of copper and global financial flows that have seen the dollar strengthen globally. In addition, the low supply of selected food items may contribute to inflationary pressures.
Given the foregoing, and the need to ensure that the levelling off of inflation pressures over the third quarter is consolidated into lower inflation in 2015, the MPC decided to increase the BoZ policy rate by 50 basis points to 12.5%. The MPC also decided to maintain the statutory reserve ratios at their current levels.
The Bank of Zambia re-iterates its commitment to safeguard macroeconomic stability by focusing on the maintenance of price and financial stability and maintaining a flexible exchange rate regime. The MPC noted that the financial sector remains well capitalized, profitable and stable, and that the fundamentals of the Zambian economy remain strong. As already indicated we are confident that the growth target of 6.5% will be met, with the possibility of an even higher growth rate being achieved in 2014.

The next MPC meeting is scheduled to take place on February 8, 2015. In the interim, the MPC will continue to monitor financial sector developments as well as developments in the broader economy and will not hesitate to take appropriate monetary policy measures that safeguard macroeconomic stability and ensure that the country’s growth objective is not stifled."

    www.CentralBankNews.info

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Central Bank News Link List - Nov 19, 2014 - Fed sees limited impact from overseas weakness, market turmoil

November 19, 2014 by CentralBankNews   Comments (0)

Here's today's Central Bank News' link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don't miss any important news.

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Georgia holds rate and revises down inflation forecast

November 19, 2014 by CentralBankNews   Comments (0)

    Georgia's central bank held its benchmark refinancing rate steady at 4.0 percent and revised downwards its inflation forecast but confirmed that it still considers it necessary to slowly exit its accommodative policy stance.
    The National Bank of Georgia (NBG) began tightening its policy in February but since then it has held back from further tightening in light of increased risks that impacted domestic and external demand and slowed the process of inflation reaching its 6.0 percent target.
    The NBG said its latest forecast sees inflation reaching its target by the end of 2015.
    In October Georgia's headline inflation rate eased to 3.4 percent from 4.8 percent in September.

    The National Bank of Georgia issued the following statement:
   

"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on November 19, 2014 and decided to keep the refinancing rate unchanged at 4 percent.
Inflation forecast has been revised downward as new information had been released since the previous MPC meeting. This was mostly related to the processes taking place in the region and in trade partners of Georgia as well as price decrease on world commodity markets. Therefore, in order to meet the inflation target the committee decided to keep the policy rate unchanged at this stage.
Despite the lower inflation forecast, in the medium term the gradual exit out of accommodative monetary policy is still necessary. According to the updated forecasts the inflation will reach its target value by the end of 2015. The annual inflation in October was 3.4%.
According to preliminary estimates the real GDP grew by 5.5% in the third quarter and the preliminary data on the GDP growth in the first three quarters of the year are consistent with the forecasts. The output gap is negative, although it has decreasing trend. The recovery of the domestic demand is also evident from the increase in imports. Importantly, the credit activity keeps growing, with a significant increase in business loans. As for the external demand, it’s still decreasing. According to preliminary data the export dropped by 5.2% in October. Given the worsening situation in the economies of the region, the external demand remains the main risk-factor.
The NBG will continue to monitor the developments in the economy and financial markets and will use all means and instruments at its disposal to ensure price stability. The dynamics of further changes in monetary policy will depend on the dynamics of expected inflation, tendencies in economic growth, global and regional economic environment.
The next meeting of the Monetary Policy Committee will be held on December 17, 2014. "



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BOJ holds target for 80 trln yen boost in monetary base

November 19, 2014 by CentralBankNews   Comments (0)

    The Bank of Japan (BOJ) maintained it recently-revised target for boosting the country's monetary base by an annual pace of about 80 trillion yen and repeated that the country's economy is recovering moderately though it acknowledged weakness on the production side to the drop in demand following the April sale tax hike.
    The BOJ, which on Oct. 30 raised its target for increasing the monetary base by 10-20 trillion yen, also noted that exports from Japan have been "more or less flat" and changed its estimate of inflation, saying annual consumer price inflation is "likely to be at around the current level for the time being," a shift since September when its said consumer price were likely to rise by around 1.25 percent.
     The BOJ issued the following statement:

  1. "At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided, by an 8-1 majority vote, to set the following guideline for money market operations for the intermeeting period:[Note 1]

    The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.
  2. With regard to the asset purchases, the Bank decided, by an 8-1 majority vote, to continue with the following guidelines:[Note 2]
    1. a)  The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen. With a view to encouraging a decline in interest rates across the entire yield curve, the Bank will conduct purchases in a flexible manner in accordance with financial market conditions. The average remaining maturity of the Bank's JGB purchases will be about 7-10 years.
    2. b)  The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 3 trillion yen and about 90 billion yen respectively.
    3. c)  As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen respectively.
  3. Japan's economy has continued to recover moderately as a trend, although some weakness particularly on the production side has remained due mainly to the effects of the subsequent decline in demand following the front-loaded increase prior to the consumption tax hike. Overseas economies -- mainly advanced economies -- have been recovering, albeit with a lackluster performance still seen in part. Exports have been more or less flat. Business fixed investment has been on a moderate increasing trend as corporate profits have improved. Public investment has more or less leveled off at a high level. Private consumption has remained resilient as a trend with the employment and income situation improving steadily, and the effects of the decline in demand following the front-loaded increase have been waning on the whole. As for housing investment, the decline following the front-loaded increase has continued, while signs of bottoming out have been observed recently. Some weakness in industrial production has remained with continued inventory adjustments. Meanwhile, financial conditions are accommodative. On the price front, the year-on-year rate of increase in the consumer price index (CPI, all items less fresh food), excluding the direct effects of the consumption tax hike, is around 1 percent. Inflation expectations appear to be rising on the whole from a somewhat longer-term perspective.
    1. With regard to the outlook, Japan's economy is expected to continue its moderate recovery trend, and the effects including those of the subsequent decline in demand following the front-loaded increase prior to the consumption tax hike are expected to dissipate gradually. The year-on-year rate of increase in the CPI is likely to be at around the current level for the time being.
    2. Risks to the outlook include developments in the emerging and commodity-exporting economies, the prospects regarding the debt problem and the risk of low inflation rates being protracted in Europe, and the pace of recovery in the U.S. economy.
    3. Quantitative and qualitative monetary easing (QQE) has been exerting its intended effects, and the Bank will continue with the QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate.[Note 3]

    [Note 1] Voting for the action: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. R. Miyao, Mr. Y. Morimoto, Ms. S. Shirai, Mr. K. Ishida, and Mr. T. Sato. Voting against the action: Mr. T. Kiuchi. The member voting against the action considered that the guideline for money market operations before the decision of the "Expansion of the Quantitative and Qualitative Monetary Easing" on October 31, 2014 was appropriate.
    [Note 2] Voting for the action: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. R. Miyao, Mr. Y. Morimoto, Ms. S. Shirai, Mr. K. Ishida, and Mr. T. Sato. Voting against the action: Mr. T. Kiuchi. The member voting against the action considered that the guideline for asset purchases before the decision of the "Expansion of the Quantitative and Qualitative Monetary Easing" on October 31, 2014 was appropriate.

    [Note 3] Mr. T. Kiuchi proposed that the Bank will aim to achieve the price stability target of 2 percent in the medium to long term and designate the QQE as an intensive measure with a time frame of about two years. The proposal was defeated by an 8-1 majority vote. Voting for the proposal: Mr. T. Kiuchi. Voting against the proposal: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. R. Miyao, Mr. Y. Morimoto, Ms. S. Shirai, Mr. K. Ishida, and Mr. T. Sato

    (Reference) Meeting hours:
    November 18: 14:00-16:05 November 19: 9:00-12:19
    Policy Board members present: Haruhiko Kuroda (Governor)
    Kikuo Iwata (Deputy Governor) Hiroshi Nakaso (Deputy Governor) Ryuzo Miyao
    Yoshihisa Morimoto

    Sayuri Shirai Koji Ishida Takehiro Sato Takahide Kiuchi
    (Others present) November 18
    From the Ministry of Finance:
    Makoto Nakagawa, Councilor (14:00-16:05)

    From the Cabinet Office:
    Akihiro Nakamura, Deputy Director-General, Economic and Fiscal Management

    (14:00-16:05)
    November 19
    From the Ministry of Finance:

    Ichiro Miyashita, State Minister of Finance (9:00-11:54, 12:09-12:19) From the Cabinet Office:
    Mamoru Maekawa, Director-General, Economic and Fiscal Management (9:00-11:54, 12:09-12:19)
    Release of the Monthly Report of Recent Economic and Financial Developments: 14:00 on Thursday, November 20 (Japanese)
    16:30 on Friday, November 21 (English)
    -- The English translation of the summary of the Monthly Report will be released at 14:00 on Thursday, November 20

    Release of the minutes:

    8:50 on Thursday, December 25"

        www.CentralBankNews.info

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