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Angola raises rate 50 bps as inflation rises further

July 28, 2015 by CentralBankNews   Comments (0)

    Angola's central bank raised its benchmark Basic Interest Rate (BNA) by another 50 basis points to 10.25 percent, its third rate hike this year, noting that the annual inflation rate rose further to 9.61 percent in June from 8.86 percent in the previous month.
     The National Bank of Angola, which has now raised its rate by 125 basis points this year, also raised the rate on its Standing Lending Liquidity Facility to 11.0 percent from 10.50 percent.
    The central bank added that preliminary data for June showed that credit to the economy grew by 5.56 percent in cumulative terms since the beginning of the year.



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Kyrgyzstan cuts 150 bps as inflation slows further

July 28, 2015 by CentralBankNews   Comments (0)

    The central bank of the Kyrgyz Republic cut its monetary policy rate by a further 150 basis points to 8.00 percent, saying seasonal factors helped inflation slow down to 5.0 percent as of July 17 compared with 11.6 percent at the start of the year.
   The National Bank of the Kyrgyz Republic, which has now cut its rate by 250 basis points this year, repeated it recent statement that it will continue to take appropriate measures to achieve its medium-term inflation rate of 5 to 7 percent.
    In June inflation in the Kyrgyz Republic fell to 4.5 percent from 6.0 percent in May.
    Earlier this month the International Monetary Fund said Kyrgyzstan's economy had "remained resilient in spite of the economic slowdown in Russia and the region."

    The National Bank of the Kyrgyz Republic issued the following statement:

    "On July 27, 2015, the Board of the National Bank of the Kyrgyz Republic decided to lower the monetary policy rate by 150 basis points, to 8.00 percent. 

Seasonal factor conditioned slowdown of inflation, which come to 5.0 percent in annual term as of the middle of July (as of July 17, 2015) against 11.6 percent as of the beginning of the year.  
High economic growth in January-June of 2015 (7.3 percent) was mainly driven by expansion of production at the “Kumtor” gold-mining company. Without “Kumtor”, the real GDP growth was 4.4 percent. 
In view of forecasted dynamics of inflationary developments, the National Bank of the Kyrgyz Republic continues to monitor the situation in the national economy and will take appropriate measures of monetary policy consistent with statutory mandate. The monetary policy will be aimed at achieving and maintaining the inflation rate at the level of 5-7 percent in the medium term, which is determined by the Main directions of monetary policy guidelines of the National Bank of the Kyrgyz Republic for the medium term.  
The next meeting of the Board of the National Bank of the Kyrgyz Republic on the monetary policy rate is scheduled for August 24, 2015. "


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Don’t Be Fooled: This is No Hedge Fund Replication

July 28, 2015 by John Abbink   Comments (0)

On Wednesday, the Wall Street Journal ran a blog on replicating hedge fund returns.  The technique proposed by Tim Edwards, an analyst with S&P Dow Jones Indices, could not be simpler.  He constructed a model consisting 50% of the returns on the S&P U.S. Aggregate Bond Index and 50% on those of the S&P Global 1200 Index, rebalanced monthly, charging a 1.5% annual management and a 15% performance fee.  He compared it with the HFRI Fund-Weighted Composite Index, which is constructed from the reported returns of hedge funds worldwide.  The blog provided this graph of the model’s monthly returns against the benchmark:
No analysis was provided, but the graph is all that is needed to show that the series are tightly correlated: from the look of it, probably >0.9.  Note that the replication was consistently and significantly more volatile than the index it allegedly replicates.
Mr. Edwards is quoted saying “The average hedge fund looks like a fixed blend of cheap investments, at high cost.”  He has not demonstrated this.  What he has shown is that an unweighted index aggregating >2,000 managers’ returns will, over short periods, resemble broad market indices.  It does not analyze the funds’ performance over periods meaningful to investors, and over which the funds’ cumulative returns and volatility would differentiate them from an index.  Mr. Edwards’s model replicates the mean fund and chain-links its return to that of the next month’s mean return: it does not replicate any particular fund, so there is no sense in which it replicates an “average” hedge fund.  Volatility lowers compounded returns, so his model underperforms even that notional fund on both absolute and risk-adjusted bases over periods of a year or more.
That an average of many funds’ returns resembles such a model over short periods is not surprising.  The World Federation of Exchanges’ June report counted 42,759 companies worldwide.  The overwhelming majority of them would not attract a fund’s attention, so hedge funds’ portfolios inevitably overlap.  In a given month, returns on the Russell 1000 are similar to the average of all large cap U.S. equity funds, too.  But hedge funds’ returns disperse widely around the mean and are negatively skewed: the return on the median fund (the one outperformed by as many funds as it outperforms) is higher than the mean return of all funds.  Based on the graphic with which we are provided, Mr. Edwards’s technique creates a roughly sixtieth percentile hedge fund clone, in a period of consistently rising markets that favor a long-only comparison.  This is hardly impressive.
There are many issues regarding indices that purport to measure hedge fund returns.  They include survivorship bias, whether the “best” funds report their returns at all, and whether funds that do report are honest (it is in their interest to report returns which flatter their actual performance).  And quite apart from issues with indices, there are plenty of reasons to be skeptical about hedge fund.  The extent to which leverage parades itself as alpha is the most important one.
I am skeptical about “hedge fund beta,” and consequently doubtful about any approach to hedge fund replication based on aggregate fund returns rather than the returns of a specific fund.  The high dispersion of hedge fund returns indicates that the mean of those returns has limited value as a series to replicate: any data can be correlated with sunspots, Elvis sightings, etc., and data-mining will always find a series it resembles.  A specific fund at least provides a meaningful basis for comparison with other financial series, and one that might be worth the trouble of using factor analysis or replicated trading strategies, to replicate.  I am nevertheless skeptical.  But I am not skeptical about crude strategies such as that proposed by Mr. Edwards: it is not a replication at all.

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Israel maintains rate, inflation may take longer to rise

July 27, 2015 by CentralBankNews   Comments (0)

    Israel's central bank left its benchmark interest rate at 0.10 percent, saying the recent decline in energy prices along with the appreciation of the shekel "are liable to defer the return of the inflation rate to within the target range."
    The Bank of Israel (BOI), which cut its rate by 15 basis points in February to counter the negative impact on exports and inflation from a rise in the shekel, also repeated its guidance from last month that it "will examine the need to use various tools to achieve its objectives of price stability," a sign that it may still resort to unconventional policy tools if considered necessary.
    Israel's inflation rate was steady at minus 0.4 percent in June and May, with the BOI saying the rate of increase during the March to June period was consistent with achieving its inflation target of 1.0 to 3.0 percent.
    However, measured over the last 12 months, the BOI added that inflation is expected to remain negative "for several more months" and the fall in energy prices that resumed in the last month along with the rise in the shekel was likely to postpone the return of inflation to the target range.
    The BOI said short-term inflation expectations from various sources remained around the lower bound of its target range in the last month while private forecasters projections for the next 12 months are for an increase of 1 percent on average. Twelve-month inflation expectations from markets are currently 1.0 percent and expectations for 2 years are 1.3 percent.
    However, most private forecasters do not expect a reduction in the BOI's rate, projecting it to be 0.29 percent in one year.
    The shekel started falling against the U.S. dollar in August 2014 and continued until mid-March, hitting just over 4 to the dollar. It then strengthened through mid-June to 3.7 before then firming again slightly. Today it was quoted at 3.78 to the dollar for an appreciation of 3.0 percent this year.

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

"The main considerations behind the decision 
The decision to keep the interest rate for August 2015 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 over the next twelve months, and to support growth while maintaining financial stability. The path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and in the global economy, and the exchange rate of the shekel, as well as on monetary policies of major central banks. 
The following are the main considerations underlying the decision:
·         The rate of increase in the CPI over the preceding four months has been consistent with the inflation target. Short-term inflation expectations from various sources are around the lower bound of the target range. Expectations for medium and longer terms remain entrenched near the midpoint of the target range. However, the decline in energy prices, which resumed in the past month, and the appreciation of the shekel, may defer the return of the inflation rate to within the target range. 
·         Indicators of real economic activity that became available this month point to the economy continuing to grow at its moderate rate of recent years, led by private consumption and with a decline in exports. The second quarter Companies Survey supports this assessment. The Composite State of the Economy Index increased by 0.4 percent in June, and was positively affected by an increase in imports and in the job vacancy rate, but declines in goods exports and in industrial production were notably negative components. Labor market data continue to indicate a high level of employment and activity. 
·         Developments in China’s economy and the debt crisis in Greece, despite their recent stabilization, continue to pose risks to a global economic recovery. Moderate recovery continues in the US and Europe. While in the US the probability increased of an interest rate rise beginning this year, in Europe the monetary expansion continues, and in several economies the interest rate was reduced.
·         The shekel strengthened by 2.5 percent in terms of the nominal effective exchange rate this month, and has appreciated by 7.1 percent for the year to date, primarily as a result of the weakening of the euro. The appreciation, and the moderation in growth of world trade, weigh on the growth of exports and of the tradable sector.
·         Robust activity in the housing market, both on the supply side and on the demand side, continued this month, and was reflected in a record level of new mortgage volume, and an especially elevated level of new home sales. In the past 12 months, home prices have increased by 3.2 percent. 
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 August 2015 will be published on August 10, 2015. 
The decision regarding the interest rate for September 2015 will be published at 16:00 on Monday, August 24, 2015."

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This week in monetary policy: Israel, Angola, Kyrgyzstan, Brazil, U.S.A., Bulgaria, Moldova, Fiji, Egypt, Ukraine, Mexico, Russia, Colombia and Trinidad & Tobago

July 27, 2015 by CentralBankNews   Comments (0)

   This week (July 27 through August 1) central banks from 14 countries or jurisdictions are scheduled to decide on monetary policy: Israel, Kyrgyzstan, Brazil, United States, Bulgaria, Moldova, Fiji, Egypt, Ukraine, Mexico, Russia, Colombia and Trinidad & Tobago.
    Following table includes the name of the country, its MSCI classification, the direction of the latest decision, the date the new policy decision will be announced, the current policy rate, and the rate one year ago.
    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

JUL 27-AUG 1, 2015:

ISRAEL DM UNCH. 27-Jul 0.10% 0.50%
ANGOLA RAISE 27-Jul 9.75% 8.75%
KYRGYZ REPUBLIC  UNCH. 27-Jul 9.50% 6.50%
BRAZIL EM RAISE 29-Jul 13.75% 11.00%
UNITED STATES DM UNCH. 29-Jul 0.25% 0.25%
BULGARIA FM UNCH. 30-Jul 0.02% 0.03%
MOLDOVA RAISE 30-Jul 15.50% 3.50%
FIJI UNCH. 30-Jul 0.50% 0.50%
EGYPT EM UNCH. 30-Jul 8.75% 9.25%
UKRAINE FM UNCH. 30-Jul 30.00% 12.50%
MEXICO EM UNCH. 30-Jul 3.00% 3.00%
RUSSIA EM CUT 31-Jul 11.50% 8.00%
COLOMBIA EM UNCH. 31-Jul 4.50% 4.25%
TRINIDAD & TOBAGO RAISE 31-Jul 4.00% 2.75%

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Pakistan maintains policy rate, favorable inflation outlook

July 26, 2015 by CentralBankNews   Comments (0)

    Pakistan's central bank kept its new policy rate steady at 6.50 percent, as expected, saying the lagged effects of the recent monetary expansion and benign inflation expectations would result in a favorable outlook for inflation.
    The State Bank of Pakistan (SBP), which cut its policy rate by a total of 300 basis points in its 2015 fiscal year that ended June 30, expects headline inflation to pick up modestly in the second half of the current fiscal year due to the comparison with low rates and firmer crude oil prices.
    However, there are also upside risks to inflation from any upward adjustment in electricity and gas tariffs, a low level of food prices may have an adverse impact on next year's food production, aggregate demand may pick up due to the low interest rates, remittances and overall production may be higher than projected, the central bank added.
    "However, there is no major change in SBP's previous inflation forecast," the bank said.
    Pakistan's headline inflation rate averaged 4.5 percent in fiscal 2015, down from 8.6 percent in fiscal 2014, with consumer price inflation rate in June rising marginally to 3.2 percent from 3.16 percent in May.
    The SBP projects headline inflation of 4.5 to 5.5 percent in fiscal 2016, which began on July 1, below its 8.0 percent target.
    In its May statement the SBP introduced a revised interest rate corridor that was aimed at strengthening the transmission of monetary policy. Under the previous regime from 2009, there was no instrument to limit very frequent drops in the repo rate and the money market repo rate also at times exceeded the reverse repo rate, which at that point was the policy rate.
    The idea behind the new rate structure was to align the central bank's operational target with a policy rate that was set within the corridor. The SBP Target Rate, or the new policy rate, was set 50 basis points below the ceiling of the corridor, which was cut by 100 basis points in May, while the corridor was narrowed by 50 basis points to 200 points.

    The State Bank of Pakistan issued the following executive summary in its July policy statement:


"1. Improvements in macroeconomic indicators led SBP to continue with its accommodative monetary policy stance and slash the policy rate by a cumulative 300 bps in FY15. The key factors facilitating the decisions can be pinned down to a sharp decline in CPI inflation, along with its benign outlook, and improvement in external account. In addition to this, narrowing of fiscal deficit and continuation of Extended Fund Facility (EFF) improved the market sentiments. These developments also led to an upgrade of Pakistan’s sovereign ratings by international rating agencies in recent months. Macroeconomic stability thus achieved should reflect positively on real economic activity going forward.

2. Following its declining trend in nearly every month of FY15, average CPI inflation came down from 8.6 percent in July FY15 to 4.5 percent in June FY15. Some recent developments such as lagged impact of monetary easing in FY15, expected higher monetary expansion in FY16, bottoming out of inflationary expectations,1 and the base effect of historically low inflation during the second half of FY15 might suggest slight deviation in the disinflationary trend of FY15 going into FY16. However, there is no major change in SBP’s previous inflation forecast.

3. There is a possibility of upward revision in energy tariffs in FY16 and an adverse impact of floods on production of perishable food items going forward that could have an upward pressure on inflation. Meanwhile, projections of high oil production and weak global demand suggest that international oil price might not have bottomed out yet. Given the recent behavior of Pakistani CPI inflation amid falling international oil prices, this could result in keeping inflation on the lower side.

4. While GDP growth in FY15 at 4.2 percent was slightly higher than that of FY14, it remained lower than the target. In particular, industrial sector missed the target due to lower growth in Large-scale Manufacturing (LSM) and electricity generation; however, the activities in construction and mining and quarrying remained buoyant. Agriculture sector despite some losses to major crops from untimely and heavy rains did mange to record some improvement. Noticeable increase in growth, as in the previous few years, came in the services sector.
5. Going forward, expected higher consumption in low interest rate environment, planned increase in development spending, and budgetary incentives for construction sector could provide some thrust to growth. Moreover, implementation of infrastructure projects planned under the China-Pakistan Economic Corridor (CPEC) and addressing structural issues especially related to energy and security would create favorable investment environment which is necessary to sustain economic growth over the medium to long term.

6. The balance of payments position continued to improve in the second half of FY15. Reduction in external current account deficit due to decline in import bill and steady growth in workers’ remittances are key factors behind the improved external position. Successful completion of reviews under EFF program, issuance of international Sukuk and disbursement of program related funding continue to support reserves building besides instilling stability in the foreign exchange market. The net SBP foreign exchange reserves rose from $10.5 billion at end-December 2014 to $13.5 billion as of 30th June 2015.

7. Despite these positive developments, due to structural bottlenecks, sluggish global demand, and lower commodity prices, exports contracted by 3.7 percent in FY15. Moreover, net Foreign Direct Investment (FDI) declined to 0.3 percent of GDP in FY15. More work therefore needs to be done in the coming years to attract investments.

8. In the short-to-medium term, nonetheless, the disbursements of program related funding and planned issuance of Eurobonds are expected to support an upward trajectory in foreign exchange reserves. Therefore, net SBP reserves are projected to increase slightly above 4 months of imports by end-June 2016. Having said this, the need to revive private inflows and exports to sustain this trajectory in foreign exchange reserves remains there.

9. The revised FY15 budget estimates show fiscal deficit of 5.0 percent, lower than the previous year. The estimated reduction in fiscal deficit in FY15 is primarily due to improvement in tax revenues. Total expenditures, on the other hand, are estimated to remain higher than the budget estimates despite reduction in subsidies and lower interest payments. Achieving the FY16 fiscal deficit target of 4.3 percent depends on collection of estimated Rs145 billion from Gas Infrastructure Development Cess and FBR revenue target of Rs3104 billion.

10. The deceleration in broad money (M2) growth from 15.9 percent in FY13 to 12.5 percent in FY14 has slightly reversed in FY15 to 13.2 percent. While Net Domestic Assets (NDA) led the growth in M2, Net Foreign Assets (NFA) decelerated in FY15. Despite better current account balance, deceleration in NFA of the banking system was a result of lower capital and financial inflows. Government reliance on banking system, specifically on scheduled banks, for its financing needs boosted the NDA of the banking system. Scheduled banks’ financing of both commodity operations and PSEs also witnessed higher flow in FY15 against FY14.

11. Private Sector Credit (PSC) increased by Rs 208.7 billion during FY15 as compared to Rs 371.4 billion in FY14. The major drag for PSC remains the structural bottlenecks and low commodity prices. In FY16, construction and real estate sectors show promise as indicated by their continued credit uptake. The lagged impact of easy monetary policy of FY15 is also expected to positively affect the credit growth in the upcoming credit cycle in the first half of FY16. On supply side, possibly making lending slightly more attractive is the spread between WALR and 3-month T-bill rates) that has edged up from 113bps (on average) in FY14 to 131bps (on average) in FY15.

12. The liquidity conditions in the Q3-FY15 remained stressed but later in Q4-FY15 due to net retirement of government borrowing from banking system it eased a bit. Following the easy monetary policy stance other market interest rates also posted decline almost throughout the second half of FY15. However, a change has been observed in the market sentiments since the release of inflation numbers for May 2015.

13. Following the improvements in the Interest Rate Corridor (IRC) framework in May 2015, SBP has ensured that the money market average overnight rate remains close to the newly introduced Target (Policy) Rate at 6.5 percent. This led to an increase in both volume and frequency of open market operations (OMO). As a result, the overnight repo rate remained (on average) 2 bps below the policy rate of 6.5 percent in the post May 2015 monetary policy decision period. Furthermore, there has been less volatility in the overnight rate.

14. Given the above macroeconomic considerations, SBP Board of Directors has decided to keep the SBP Policy Rate unchanged at 6.5 percent. "


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Nigeria maintains rate, sees 2015 growth of 5.5%

July 25, 2015 by CentralBankNews   Comments (0)

    Nigeria's central bank maintained its Monetary Policy Rate at 13.0 percent, as expected, citing the need to maintain a tight monetary policy due to high liquidity and a steady rise in inflation against a backdrop of an expected rise in U.S. interest rates that could accentuate capital outflows and thus increase the pressure on the naira's exchange rate.
     The Central Bank of Nigeria (CBN), which last raised its rate by 100 basis points in November 2014, clearly agonized over its policy decision, noting "the absence of easy choices in the circumstances" and the limitation of monetary policy to tackle the economic challenges.
    Nigeria's economy has been hit hard by the fall in oil prices, cutting into government revenues, and reducing economic growth.
    The central bank forecast growth in fiscal 2015 of 5.54 percent, down from 2014's 6.22 percent.
    The country's Gross Domestic Product contracted by 11.57 percent in the first quarter from the previous quarter for annual growth of 3.96 percent, down from 5.94 percent, as the oil and gas sector shrank by 8.15 percent in contrast to modest growth of 1.2 percent in the fourth quarter of 2014.
    The central bank also noted its concern over the "gradual but steady increase in headline inflation," but added that the drivers were largely of a transient nature and outside its control.
    "Consequently, the opportunity for further policy maneuver remains largely constrained in the absence of supporting fiscal measures," the central bank said, urging a coordination of monetary, fiscal and structural policy to stimulate growth and stabilize the exchange rate.
    Nigeria's headline inflation rate rose to 9.2 percent in June from 9.0 percent in May, reflecting increases in both core inflation and food.
    The naira fell sharply from November last year to March and the central bank has banned some importers from access to hard currency in an attempt to control the rate. The naira was quoted at 199 to the U.S. dollar today, down 8.3 percent since the start of the year.

     The Central Bank of Nigeria issued the following statement:

"The Monetary Policy Committee met on 23rd and 24th July, 2015 against the backdrop of lingering uneven recovery in the global economy and slowing growth in the domestic economy. In attendance were all 12 members. The Committee reviewed the global and domestic economic and financial environment in the first half of 2015 as well as the outlook for the rest of the year.

International Economic Developments
The Committee observed that global output recovery remained largely sluggish although with strong promise in the United States and the Euro area. The IMF maintained its growth forecast of 3.5 per cent for 2015 with improved outlook for the advanced economies but weak performance in the emerging and developing economies. Softening oil prices continued to present improved growth opportunities for the advanced economies and oil importing countries while dampening growth prospects in oil exporting economies. The United States led growth in the advanced economies largely on account of lower energy prices, increased consumer spending and housing market recovery. The expectations of US monetary policy normalization in the medium term continued to fuel investor expectations. Growth outlook for the US remains steady as inflation stays below the Federal Reserve’s 2 per cent target.
The Bank of Japan continued its accommodative monetary policy stance by injecting ¥6.7 trillion ($55.83 billion) monthly under its assets purchase programme. In the Euro area, the Greek debt crisis crystalized into uncertain and difficult negotiations with the tripartite group of creditors and altered the underlying confidence in the survival of Greece in the Eurozone.
Meanwhile, the ECB’s €61 billion monthly asset purchase programme continues, in an effort to combat the effects of deflation and high unemployment in the peripheral economies. The Bank of England has maintained its £375 billion asset purchase programme in the face of the downward trend in inflation, in most of the surrounding euro area economies. These expansionary policies by the ECB, Bank of England and the Bank of Japan, could moderate the threat of capital reversal posed by the imminent normalization of US monetary policy.

Amongst the emerging markets and developing economies, growth is expected to slow considerably but resume moderately in 2016. Growth in China is projected to slow at 6.3 per cent in 2016 from 6.8 per cent in 2015 due to continued financial market vulnerabilities, declining productivity, excess capacity and weakening domestic demand.
Growth in the developing economies is expected to remain uneven
in the short-to-medium-term, largely reflecting their weak demand,

lower commodity prices and tight financial conditions.

Global inflation is expected to remain moderate at 3.5 per cent in 2015 but projected to accelerate to 3.7 per cent in 2016, due to rising downside risks, particularly in the Euro area, as well as the tailwinds arising from the sharp drop in oil prices, excess capacity in the advanced economies and the appreciation of the US dollar.

Domestic Economic and Financial Developments
Output growth in the first half of 2015 continued to decelerate compared with the end-December 2014 level, mainly as a result of softening oil prices. According to the National Bureau of Statistics (NBS), growth in real GDP declined to 3.94 per cent in the first quarter of 2015, from 5.94 and 6.21 per cent in the preceding quarter and corresponding period of 2014, respectively. Real GDP growth is projected at 5.54 per cent for fiscal 2015, reflecting a 68 basis point decrease compared with the 6.22 per cent in 2014. At 5.59 per cent, the non-oil sector continued to be the main driver of output growth in the first quarter of 2015, at 5.59 per cent with the leading growth
sectors being construction, services, agriculture and trade which grew by 11.17, 6.85, 4.70 and 4.47 per cent, respectively. On the other hand, the oil and gas sector declined by 8.15 per cent, in contrast to the modest growth of 1.2 per cent achieved in the last quarter of 2014. 
While the successful conduct of the 2015 general elections was a stabilizing factor for the economy, persistent scarcity of fuel products as well as slow improvements in electricity supply could be a drag on output growth in the near term. The Committee underscored the need for the intensification of various ongoing initiatives to diversify the economy away from oil, and expand the base for foreign exchange receipts.

The Committee was concerned about the gradual but steady increase in headline inflation up to June 2015, and noted that this reflected a rise in both the core and food components of inflation. Core inflation rose to 8.4 per cent in June from 8.3 per cent in May, and food inflation increased to 10.0 per cent from 9.8 per cent, over the same period.
The Committee observed that the uptick in year-to-date inflation rates was traceable to transient factors such as energy, arising from scarcity of petroleum products around the country, poor electricity supply and increased demand for transportation and food, from the build-up to the general elections and the ensuing Easter and Sallah celebrations.
The Committee reiterated its commitment to price stability, and observed that monetary policy would remain tight because of the high liquidity in the system. It however, noted that the drivers of the current upward inflationary spiral were of a transient nature and mostly outside the direct control of monetary policy. Consequently, the opportunity for further policy maneuver remains largely constrained in the absence of supporting fiscal measures. It therefore, urged for coordination of monetary, fiscal and structural policies to stimulate output growth, and stabilize the exchange rate.

Monetary, Credit and Financial Markets Developments 

Broad money supply (M2) declined by 0.61 per cent in June 2015, below the level at end-December 2014. The modest decline in money supply reflected the decreases in the net foreign assets of 16.15 per cent and other assets (net) of 21.40 per cent. Net domestic credit (NDC), however, grew by 13.45 per cent. Annualized, NDC grew by 27.90 per cent over the end-December 2014 level but essentially within the provisional benchmark of 29.30 per cent for fiscal 2015. The growth in aggregate credit was attributable to growth in Federal Government borrowing which reached 40.81 per cent in June 2015.
During the period under review, money market interest rates were relatively volatile, owing to fluctuations in banking system liquidity. Average inter-bank call and OBB rates opened at 6.55 and 6.45 per cent on 1st July, 2015 and closed at 26.51 and 21.00 per cent, respectively, on July 23, 2015. Average inter-bank call and OBB rates for the period were 9.83 and 10.23 per cent, respectively.
The Committee noted a bearish trend in the equities segment of the capital market during the review period. The All-Share Index (ASI) declined slightly by 1.66 per cent from 31,744.82 on March 31, 2015 to 31,216.72 on July 23, 2015. Similarly, Market Capitalization (MC) decreased by 0.37 per cent from N10.72 trillion to N10.68 trillion during the same period. Relative to end-December 2014, the market indices decreased by 9.9 and 6.9 per cent, respectively. The slight decline in share prices year-to-date was largely due to subdued sentiments preceding the general elections as well as the lingering effects of falling oil prices.

External Sector Developments
The average naira exchange rate was relatively stable at the inter- bank segment, but significantly volatile in the BDC segment during the review period. The exchange rate at the interbank market opened at N197.00/US$ and closed at N197.00/US$, with a daily average of N197.00/US$ between July 21 and July 23, 2015. The relatively stable exchange rate in the inter-bank segment can be attributed to the effects of some recent demand management measures. Gross official reserves increased from US$28.57 billion at end-May 2015 to $31.53 billion as at July 22, 2015, reflecting the blockage of leakages as well as the bank’s management policies.

Committee’s Considerations

The Committee was concerned about the trends in key macroeconomic indices in the first half of 2015.

The Committee acknowledged the absence of easy choices in the circumstance but monetary policy alone is limited, and would require urgent complementary fiscal policies to define the path of growth and create the basis for stabilization.

On the external front, the adverse effect of the protracted decline in global crude oil prices on the fiscal position of government is becoming increasingly obvious. The expected policy normalization in the US could accentuate capital flow reversals from emerging and developing economies and further tighten global monetary conditions, thus exerting greater pressure on exchange rates in those countries. Given the choice between controlling either quantity or price, the limitations on choosing quantity were evident necessitating the need to employ some flexibility around price while allowing current demand management measures to fully work their way through the economy. The Committee however noted that financial system stability considerations placed key limitations on the extent of considering price flexibility, creating a compelling need to balance measures to address the current vulnerabilities.

On inflation, the Committee stressed that some of the drivers of the current pressure on consumer prices were transient and outside the direct influence of monetary policy. Pressure on food prices is expected to gradually wane as the planting season gives way to harvests in the months ahead. Early resolution of fuel scarcity would

dampen transportation costs and improve food distribution across the country while improvements in electricity supply could steady output at lower costs.

Overall, the Committee expressed optimism that business confidence would continue to improve as Government continues to unfold its economic plans. In addition, some of the reassuring measures of the administration including efforts aimed at resolving fiscal challenges at the sub-national levels, and the fight against corruption and improving the business environment would unlock the inflow of foreign direct investment. The Committee also underscored the imperative of growing and protecting the country’s foreign reserves and building fiscal buffers in the process of strengthening confidence in the economy which is essential for promoting growth and stability.

The Committee’s Decisions
In consideration of the underlying fundamentals of the economy, the evolving international economic environment, developments in oil prices as well as the need to allow for the unveiling of the economic agenda of the Federal Government, the Committee decided by a vote of 8 to 4 to retain the Monetary Policy Rate at its current level of 13 per cent, by a unanimous vote to retain the CRR

at 31 per cent while 4 members voted to remunerate the CRR.

Overall, the MPC voted to hold its position. In summary, the MPC voted:
  1. (i)  To retain the MPR at 13 per cent with a corridor of +/- 200 basis
    points around the midpoint;
  2. (ii)  Retain the CRR at 31 per cent; and
  3. (iii)  To retain the symmetric corridor of 200 basis points around the


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Global bank lending surges in Q1, China sees fall - BIS

July 25, 2015 by CentralBankNews   Comments (0)

    Global cross-border lending continued to expand in the first quarter of 2015, propelled by a surge in lending to the euro area, while credit to emerging markets, such as China and Russia, fell for the second consecutive quarter, according to the Bank for International Settlements (BIS).
    International lending by major international banks to non-banks and other banks rocketed by an estimated $755 billion from January through March this year from end-December compared with an increase of only $16 billion in the final quarter of 2014
    The rise in global lending in the first three months of this year amounts to more than half of the entire increase of $1.457 trillion seen in 2014. After contracting by $1.148 trillion in 2013, global cross-border lending has been expanding since the second quarter of 2014.
    As in the fourth quarter of last year, major international banks have been extending increasing amount of credit to advanced economies, such as Germany, while lending to emerging economies, especially China, has been slowing.
    According to preliminary data, Swiss-based BIS said first quarter lending to advanced economies grew by $743 billion while lending to emerging economies shrank by $50 billion.
    Lending to borrowers in euros jumped by $528 billion, for annual growth of euro-denominated claims to 9 percent, said BIS, which collects international banking data worldwide.
    In contrast, global claims in U.S. dollars only rose by $58 billion as a $95 billion decline in loans was offset by a $156 billion rise in U.S. debt securities.
    Cross-border lending to borrowers in the 19-nation euro area rose by $406 billion in the first quarter, the highest rise seen since the first quarter of 2008. Claims on Germany rose by $153 billion while France also saw a significant rise of $120 billion while lending to Spain, Italy, Ireland and Portugal was largely unchanged.
    Reflecting the deep crises in Greece, global banks cut their lending by a further $22 billion in the first quarter, leading to a 28 percent fall on an annual basis. Based on an ultimate risk basis, the outstanding stock of foreign claims on Greek banks amounted to only $2.2 billion at the end of March compared with a recent peak of $31 billion at the end of June 2014.
    Continuing the trend seen in recent quarters, global lending to China continued to drop in the first quarter. Lending fell by $56 billion, driven by a $64 billion decline in credit to China's banks. This brought the outstanding stock of global claims on China to $963 billion by the end-March.
    After falling in the fourth quarter of last year, lending to several other emerging economies in Asia rose in the first quarter. Global lending to India rose by $8 billion and to Korea by $3 billion.
    Lending to emerging Europe continued to decline, albeit at a more moderate pace than in the previous quarter, BIS said.
    International claims on Russia dropped by a further $14 billion, following a $19 billion fall in the fourth quarter, but in contrast lending to Hungary and the Czech Republic picked up slightly and credit to Turkey expanded by $4 billion, boosting the annual growth rate to 9 percent.
    The recent trend toward increased lending to non-banks also continued in the first three months, with cross-border lending to non-banks accounting for more than three-quarters of the total increase. Lending to non-banks was up by $569 billion in the first quarter compared with a $186 billion increase in lending to banks.
    In 2014 international bank lending to non-banks rose by $868 billion while lending to other banks rose by $590 billion.

   Click to read "BIS international banking statistics at end-March 2015."


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Sri Lanka holds rates, inflation at current level for months

July 25, 2015 by CentralBankNews   Comments (0)

    Sri Lanka's central bank kept its benchmark policy rates steady, saying it expects the current low level of inflation to continue for the next few months due to the downward adjustment in the administered prices for fuel and energy.

    The Central Bank of Sri Lanka, which cut its policy rate by 50 basis points in April, added that core inflation was also low in June, indicating well contained underlying demand pressures.
   Sri Lanka's consumer price inflation rate eased to 0.1 percent in June from 0.2 percent in the previous month while core inflation rose to 2.8 percent, up from 2.6 percent.
    In June the central bank said inflation was projected to remain "comfortably" below 4 percent the rest of the year. It did not reiterate that statement today.
    The central bank maintained its benchmark Standing Deposit Facility Rate (SDFR) at 6.0 percent and the Standing Lending Facility Rate (SLFR) at 7.50 percent.
    The Central Bank of Sri Lanka issued the following statement:
"Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (CCPI), remained at near-zero levels recording 0.1 per cent in June 2015 compared to 0.2 per cent in the previous month. Annual average inflation also continued to moderate further to 1.7 per cent in June 2015 from 1.9 per cent in the previous month. Meanwhile, indicating well contained underlying demand pressures, core inflation also remained low at 2.8 per cent in June 2015 on a year-on-year basis compared to 2.6 per cent in the previous month. It is expected that the current level of inflation will continue in the next few months mainly reflecting the benefit of downward adjustments in administered prices of fuel and energy. 
In the monetary sector, supported by the prevailing low interest rate environment, credit to the private sector by commercial banks grew by 17.6 per cent, year-on-year, in May 2015. In absolute terms, credit to the private sector expanded by Rs. 48.6 billion in the month of May and by Rs. 150 billion on a cumulative basis during the first five months of the year. Driven by the expansion in private sector credit along with increased bank borrowings by the public sector, broad money supply (M2b) increased by 15.4 per cent on a year-on-year basis in May 2015, compared to 13.9 per cent recorded in the previous month.
With regard to the external sector, increased expenditure on imports relative to earnings from exports widened the trade deficit in May 2015. Gross official reserves, which stood at US dollars 6.8 billion at end May 2015, are estimated to have increased to US dollars 7.5 billion by end June 2015 largely representing the receipt of the proceeds from the International Sovereign Bond and Sri Lanka Development Bond issuances. At the same time, other regular inflows such as earnings from tourism and workers’ remittances also supported the external sector during this period. In addition to the US dollars 400 million made available to the Central Bank of Sri Lanka by the Reserve Bank of India (RBI) in April 2015, the Central Bank entered into another currency swap agreement with RBI on 17 July 2015 enabling the country to draw a further amount of US dollars 1.1 billion. The availability of this new facility strengthened the resilience of the external position of the country while supporting greater stability of the exchange rate. 
So far during the year, the Sri Lankan rupee has depreciated by 2.0 per cent to Rs. 133.70 against the US dollar. Meanwhile, the Department of Census and Statistics (DCS) has replaced the base year for national accounts statistics from 2002 to 2010, while upgrading the compilation methodology to comply with the United Nation’s System of National Accounts - 2008 (SNA 2008). According to the rebased national accounts statistics, real GDP growth for the first quarter of 2015 is estimated at 6.0 per cent with strong performance in the Services sector. Taking the above developments in the economy into consideration, the Monetary Board, at its meeting held on 23 July 2015, was of the view that the current monetary policy stance is appropriate. Accordingly, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 6.00 per cent and 7.50 per cent, respectively. 
Monetary Policy Decision: Policy rates unchanged Standing Deposit Facility Rate (SDFR) 6.00% Standing Lending Facility Rate (SLFR) 7.50% Statutory Reserve Ratio (SRR) 6.00%"

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Central Bank News Link List - July 23, 2015: U.S. growth seen picking up; rate hike expected in September

July 25, 2015 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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