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Central Bank News Link List - May 26, 2015: G7 finance ministers to discuss recent forex moves – Canada

May 26, 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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Israel holds rate, warns further shekel rise to hit exports

May 25, 2015 by CentralBankNews   Comments (0)

    Israel's central bank maintained its benchmark interest rate at 0.10 percent, but said continued appreciation of the shekel's exchange rate "is liable to weigh on growth of exports and of the tradable sector."

    The Bank of Israel (BOI), which cut its rate by 15 basis points in February to counter the negative impact of exports and inflation from the rise in the shekel, noted that the shekel had strengthened by about 1.3 percent against the U.S. dollar since late April though May 22 and year-to-date this amounted to an effective appreciation of 3.7 percent.
    The Bank of Israel issued the following statement:

"Background conditions

Inflation data: The Consumer Price Index for April increased by 0.6 percent, while forecasters had projected a slightly lower increase of 0.5 percent, on average. There were marked increases in the fruit and vegetables component and in the clothing and footwear (seasonal increase) component. The rate of inflation as measured by the change in the CPI over the past 12 months was negative 0.5 percent, compared to negative 1 percent over the 12 months that ended in March. Following a cumulative decline of 1.8 percent in the CPI in November–February, the Index increased by 0.9 percent, cumulative, over the past two months, despite a slight decline in the housing component in April. This has occurred inter alia against the background of a change in the trend of energy prices, which contributed 0.8 percent to the decline in the CPI over the past 12 months. The CPI excluding housing declined by 1.3 percent in the past year. CPI components representing tradable goods declined by 1.6 percent in the past 12 months, compared with a decline of 2.4 percent in the 12 months that ended in March, while components representing nontradable items increased by 0.2 percent, compared to a decline of 0.1 percent in the 12 months that ended in March. 
Inflation and interest rate forecasts: One-year inflation expectations from various sources are around the lower bound of the inflation target range. Private forecasters’ projections for the next 12 CPI readings are 1 percent, on average, compared with 1.1 percent in the previous month, and expectations derived from banks’ internal interest rates are 0.8 percent, compared to 0.6 percent last month. Twelve-month ahead inflation expectations derived from the capital market are currently 1.1 percent, and expectations for two years are 1.35 percent. Medium-term (3–5 years) forward expectations increased to 1.65 percent this month, while expectations for longer terms (5–10 years) continue to range around the midpoint of the inflation target range. Similar to last month, most private forecasters do not expect a reduction in the Bank of Israel interest rate in the next few months; however, the Telbor curve continues to point to some probability of such a reduction. 
Real economic activity: Indicators of activity for the first quarter of 2015 and for the month of April continue to point to the economy growing at the moderate rate that has prevailed in the past two years. According to the first estimate of National Accounts data for the first quarter (seasonally adjusted data in annual terms), GDP grew by 2.5 percent, and business sector product increased by 3.2 percent. Growth was led by an increase of 6.5 percent in private consumption (excluding durable goods) and an increase of 9.4 percent in exports (excluding diamonds and startups). In contrast, fixed capital formation contracted by 7.4 percent, and durable goods consumption declined by 11.2 percent. Some of the decline is the result of a sharp decrease in vehicle imports, following a steep increase in the fourth quarter of 2014. Imports (excluding ships and aircraft, diamonds and defense imports) increased by 9 percent. According to foreign trade data, goods exports (excluding ships and aircraft and diamonds) declined in April (in current dollar terms) by 4.3 percent, further to a decline of 4.7 percent in the first quarter, and business services exports (excluding startup companies) remained unchanged in February. The number of tourist arrivals and overnight stays remained significantly lower than in the first half of 2014. Following several months of relatively high growth, the Composite State of the Economy Index increased by 0.2 percent in April, led by growth in indices of industrial production and of trade revenue (in March). The business sector climate index continues to indicate that the monthly rate of growth has stabilized at 0.22–0.24 percent. The Consumer Confidence Index compiled by the Central Bureau of Statistics has increased sharply in recent months, and the index compiled by Bank Hapoalim is stable at a relatively high level. The Purchasing Managers Index continues to range around 50 points, declining to 49.2 this month.
The labor market: Labor Force Survey data for the first quarter among 25–64 year olds (the principal working ages) indicate that the unemployment rate continued to decline slightly (to 4.8 percent, compared with 4.9 percent in the fourth quarter of 2014), but this occurred against the background of a decline in the participation rate (79.5 percent compared to 79.7 percent) and in the employment rate (75.7 percent compared to 75.8 percent). April data indicate an improvement in the unemployment rate as well as in the participation and employment rates. Survey data and employee post figures indicate an increase in employment in public services, compared to stability or decline in the business sector. Nominal wages increased by 1.0 percent, and real wages by 1.1 percent, in December–February, relative to September–November (seasonally adjusted data). The first part of the increase in the minimum wage was implemented in April—from NIS 4,300 per month to NIS 4,650 per month, and was reflected in an increase in health tax receipts in April. Receipts were about 5.9 percent higher (in nominal terms) in February–April than in the corresponding period one year ago. 
Budget data: In January–April, the domestic surplus (excluding net credit) in government activity was about NIS 3.1 billion, NIS 1.7 billion greater than the seasonal path consistent with achieving the deficit target of 2.5 percent of GDP, mainly as a result of the fact that expenditures are based on a transition budget. Since the beginning of the year tax revenues have increased by 7.8 percent, in real terms, compared with January–April of last year, and are about NIS 1.7 billion higher than the seasonal path. With that, nontax revenue is about NIS 1.9 billion lower than the seasonal path. Gross domestic VAT revenues increased by about 10 percent in real terms, compared with the corresponding period in 2014. Total domestic expenditure (excluding credit) in January-April was about NIS 2 billion lower than the seasonal path that is consistent with the expenditure rule.
The foreign exchange market: From the monetary policy discussion on April 26, 2015, through May 22, 2015, the shekel strengthened by about 1.3 percent against the dollar, and weakened by about 1.3 percent against the euro. The shekel was stable in terms of the nominal effective exchange rate. 
The capital and money markets: From the monetary policy discussion on April 26, 2015, through May 21, 2015, the Tel Aviv 25 Index increased by about 1.2 percent. There was a sharp correction in the government bond market, and yields on both the nominal and CPI-indexed curves increased by up to 60 basis points; the curves steepened, similar to the global trend. The yield on unindexed bonds with 9 years to maturity increased from about 1.4 percent to around 1.8 percent. There were slight changes along the makam yield curve, and most of the curve was trading at a yield lower than the Bank of Israel interest rate. Israel's sovereign risk premium, as measured by the five-year CDS spread, remained virtually unchanged, at about 71 basis points.
The money supply: In the twelve months ending in April, the M1 monetary aggregate (cash held by the public and demand deposits) increased by 50.3 percent, and the M2 aggregate (M1 plus unindexed deposits of up to one year) increased by 12.0 percent. During May, the pace of net withdrawals from money market funds continued to moderate.
The credit market: In March, the outstanding debt of the business sector declined by about NIS 4 billion (0.5 percent) to around NIS 821 billion. With that, there was relatively high growth in outstanding credit during the first quarter, compared with the end of 2014, mainly the result of an increase in direct loans from institutional investors and, to a lesser extent, the result of an increase in bank credit and in credit from abroad. In April, the nonfinancial business sector issued about NIS 1.1 billion in bonds, lower than the monthly average over the preceding 12 months of NIS 2.9 billion. There were net withdrawals from corporate bond mutual funds in April, totaling about NIS 0.2 billion, while there was net new investment of NIS 2.6 billion in general bond funds. Corporate bond market spreads increased slightly in April, following a decline in the previous two months.
Outstanding household debt increased in March by NIS 3.3 billion (0.8 percent), of which NIS 0.4 billion (0.1 percent) was in housing debt. Despite the holidays, new mortgage volume was NIS 4.7 billion in April. The decline in the share of mortgages extended to buyers purchasing a home as an investment was halted, and the share of fixed-rate mortgages taken out continued to increase. Mortgage interest rates declined on most indexation bases this month—by 0.05 percentage points in the CPI-indexed fixed rate track, by 0.07 percentage points in the unindexed fixed rate track, and by 0.03 percentage points in the unindexed variable rate track. The interest rate in the CPI-indexed variable rate track remained unchanged.
The housing market: The housing component of the CPI (based on residential rents) declined by 0.1 percent in April, and has increased by 2.1 percent over the past 12 months. In February–March, home prices increased by 0.4 percent, and in the 12 months ending in March, they increased by 3.8 percent, similar to the previous month’s rate. Nonetheless, in the past half year their rate of growth returned to the one that prevailed before the period of waiting for the outcome of the zero VAT plan. In March, too, new homes were sold at an elevated rate. However, preliminary data indicate that the number of overall housing transactions continued to decline for all buyer categories, and the number of transactions by investors is similar to the average in recent years. The number of new homes available for sale was stable in the past four months, after declining in previous months. In the 12 months ending in February, there were about 43,200 building starts and about 44,800 building completions. 
The global economy: Global economic indicators continue to point to moderate activity. First quarter US National Accounts data indicating that GDP grew by only 0.2 percent (in annual terms) disappointed, and there are assessments that the figure is liable to be revised downward in the second reading. With that, the Federal Reserve noted in its announcement that first quarter growth was impacted on by transitory factors, and therefore it expects continued moderate growth in the coming quarters. This assessment is bolstered by labor market data, which indicate that 220,000 new jobs were added to nonfarm payrolls in April. In contrast, industrial production declined for the fifth consecutive quarter. There was generally no change in assessments regarding the date when the federal funds rate will begin to be increased in the US, and the uncertainty about the liftoff continues. In Europe, there were further indicators that pointed to the moderate recovery continuing, and first quarter GDP grew, as expected, by a quarterly rate of 0.4 percent. Estimates based on company surveys weakened this month, after a solid increase in recent months, but they continue to point to a positive trend. Weakness was also seen in the most recent data on unemployment, industrial production, and retail sales. These results sharpened the assessment that the recovery is still not entrenched. Following several negative readings, the eurozone CPI remained unchanged in April, and there was an increase in inflation expectations, against the background of higher energy prices and improvement in domestic demand. The crisis in Greece continues, and remains a significant risk to Europe’s economy. In Japan, inflation remained near zero, excluding the effect of the VAT increase, while first quarter GDP surprised to the upside, though it was primarily due to an increase in inventories. Weakness continues in China, seen in several indicators of real economic activity, and the central bank there announced an interest rate reduction. Monetary easing measures were adopted this month in several other countries as well. There were declines in most equity and bond markets worldwide. The price of oil remained virtually unchanged by the end of the period, at about $65 per barrel. Prices of commodities excluding energy also remained unchanged.
The main considerations behind the decision 
The decision to keep the interest rate for June 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, the monetary policies of major central banks, and developments in the exchange rate of the shekel. 
The following are the main considerations underlying the decision:
v  After several negative readings, the CPI increased in March and April by a cumulative 0.9 percent. Global fuel prices stabilized. One-year inflation expectations from various sources remained around the lower bound of the inflation target range, and expectations for 2 years and for medium terms rose toward the midpoint of the target range. 
v  Indicators of real economic activity remain mixed, and point toward continuing growth at the rate that prevailed in the past two years. Business sector product grew in the first quarter by 3.2 percent, and the unemployment rate continued to decline. Tax revenue data indicate continued growth in private consumption. Monthly export data, in dollar terms, point to a contraction in goods exports and to an absence of growth in services exports over recent months. 
v  First quarter GDP growth in the US was lower than expected, but assessments are that it is primarily due to transitory factors. Moderate recovery continues in the eurozone, but the crisis in Greece continues to be a significant risk to the economy. Signs of weakness continue in China’s economy. Uncertainty remains regarding the date of liftoff for the US federal funds rate.
v  From the monetary policy discussion on April 26, 2015, through May 22, 2015, the shekel strengthened by 1.3 percent against the dollar, and remained stable in terms of the nominal effective exchange rate. For the year to date, there has been an effective appreciation of 3.7 percent in the shekel, and continued appreciation is liable to weigh on growth of exports and of the tradable sector.
v  The increase in home prices continues, and new mortgage volume remains elevated.
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."

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This week in monetary policy: Israel, Angola, Kyrgyzstan, Hungary, Canada, Ukraine, Fiji and Trinidad & Tobago

May 25, 2015 by CentralBankNews   Comments (0)

    This week (May 25 through May 30) central banks from eight countries or jurisdictions are scheduled to decide on monetary policy: Israel, Angola, the Kyrgyz Republic, Hungary, Canada, Ukraine, Fiji 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.

ISRAEL DM UNCH. 25-May 0.10% 0.75%
ANGOLA UNCH. 25-May 9.25% 9.25%
KYRGYZSTAN UNCH. 25-May 11.00% 6.00%
HUNGARY EM CUT 26-May 1.80% 2.40%
CANADA DM UNCH. 27-May 0.75% 1.00%
UKRAINE FM UNCH. 28-May 30.00% 9.50%
FIJI UNCH. 28-May 0.50% 0.50%
TRINIDAD & TOBAGO RAISE 29-May 3.75% 2.75%

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Pakistan cuts rate 100 bps as inflation continues to fall

May 23, 2015 by CentralBankNews   Comments (0)

    Pakistan's central bank effectively cut its interest rates by 100 basis points to 7.0 percent and narrowed its rate corridor by the 50 points to 200 basis points as inflation continues its downward trajectory and economic conditions improve, including a smaller current account deficit.
    The State Bank of Pakistan (SBP), which earlier this year revised its rate corridor and introduced a SBP target rate for the money market overnight repo rate, said economic growth was expected to accelerate due to the gradual realization of investments in energy and infrastructure projects.
    "Overcoming energy shortages and improving law and order conditions is expected to provide further impetus in reviving investment and higher production," SBP said.
    Pakistan's Gross Domestic Product is estimated to have expanded by 4.2 percent in fiscal 2015, which ends on June 30, up from 4.0 percent in FY14.
    Pakistan's consumer price inflation rate declined to 2.11 percent in April from 2.49 percent the previous month, continuing the drop since 8.2 percent in June last year, reflecting soft international commodity prices, a stable exchange rate, contained government borrowing, moderate aggregate demand and the central bank's "earlier conservative monetary policy stance."
    SBP said inflation expectations also remain subdued but uncertainty about oil prices and possible changes in domestic energy prices are the main risks to its outlook.
    In March the SBP's board of directors approved changes to the bank's rate corridor to enhance the effectiveness of its monetary policy and better manage liquidity in the interbank market. Under its previous regime from 2009, when the SBP established an interest rate corridor, 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 was the policy rate.
    In order to improve the rate corridor, the SBP set a target rate between the floor and ceiling rates of the corridor and use purchases and sales of government securities along with other open market operations to keep the money market weighted overnight rate close to the target rate.
    Today the ceiling of the rate corridor was reduced by 100 basis points to 7.0 percent from 8.0 percent, with the new SBP target rate, or its main policy rate, set 50 points below this ceiling rate. By narrowing the rate corridor by 50 points to 200 points, the floor rate is set at 5.0 percent.

    The State Bank of Pakistan issued the following statement:

"Macroeconomic conditions towards the end of FY15 have further improved compared to the beginning of the fiscal year. Current account deficit has narrowed down; average annual inflation is significantly below the target; there is a marginal uptick in real GDP growth; and foreign exchange reserve buildup continues. All these developments were reflected in the recent upgrades in outlook by international rating agencies that have further improved investor confidence. The current macroeconomic stability achieved through domestic policies and favorable external developments provide an opportunity to focus on reforms that will put the economy on sustainable growth path.

With contraction in imports, led by sharp decline in oil prices, and strong growth in remittances, the external current account deficit at $1.4 billion during Jul-Apr FY15 is around half of the deficit recorded in the corresponding period of last year. The improvement has overshadowed lower surplus in capital and financial account, especially weak foreign private investment. Overall, this has supported the reserve building efforts with net SBP reserves rising from $9.1 billion as of 30th June 2014 to $12.5 billion as of 15th May 2015. They are expected to increase further due to subdued outlook of international oil prices, successful continuation of IMF program, and realization of expected official foreign inflows. Increase in foreign private inflows can further strengthen this outlook and sustain stability in the foreign exchange market.

The inflation continues with its downward trajectory in this fiscal year. The year-on-year CPI inflation has declined to 2.1 percent in April 2015 from 8.2 percent in June 2014. The decline in inflation during the current fiscal year has been broad based as all the headline and underlying measures of inflation have recorded deceleration. Soft international commodity prices, stability in exchange rate, contained government borrowings from SBP, moderate aggregate demand, and SBP’s earlier conservative monetary policy stance have remained the key factors in controlling inflation this year. Going forward, continuation of inflation at lower levels is reflected in the latest IBA-SBP survey of May 2015 that reports subdued inflation expectations. However, uncertainty about international oil prices and possible adjustment in domestic energy prices are the main risks to this inflation outlook.

Credit growth during Jul-Mar FY15 has remained well diversified in terms of coverage and type of finance. All three sectors of the economy agriculture, manufacturing and services availed credit both for working capital and for fixed investment purposes. The highlight remains the loans to private sector businesses in fixed investment category that increased to Rs84.4 billion in Jul-Mar FY15 from Rs50.3 billion in the same period of last year. However, owing largely to decrease in commodity prices, loans in the working capital category dropped to Rs90.3 billion in Jul-Mar FY15 from Rs223.8 billion in the same period of FY14. Improving investor confidence, buoyant construction activity, continuous stability of the banking system, and the recent monetary easing are expected to positively impact credit uptake in the coming months.

Broad money (M2) has expanded by 7.3 percent during July 01-May 08, FY15 against 7.0 percent during the same period last year. Importantly, the contribution of Net Foreign Assets in the expansion of M2 continues to remain substantial. This has favorably impacted the Net Domestic Assets-to-Net Foreign Assets ratio. The favorable improvement in this ratio is expected to continue with the availability of anticipated external flows. M2 is likely to grow within the safe limits; consistent with the inflationary outlook.

After remaining tight during most of the current fiscal year, liquidity conditions at the back of overall improvement in balance of payments have relatively eased towards the end of FY15. The money market overnight repo rate, on average, remained 49 basis points below the SBP’s policy rate in the post March 2015 monetary policy decision compared to 33 basis points in the post January 2015 decision. These developments bode well for the smooth transmission of policy rate changes to other market interest rates in addition to the implementation of the revised interest rate corridor framework. In line with monetary policy stance, market interest rates have fallen since January 2015. With current trends in key macroeconomic variables, money market liquidity is expected to remain at ease in the coming months.

Real GDP is provisionally estimated to have grown by 4.2 percent in FY15, slightly higher than 4.0 percent in FY14. Overcoming energy shortages and improving law and order conditions is expected to provide further impetus in reviving investment and higher production. Gradual realization of planned investment in energy and infrastructure projects will provide additional boost to growth. Consequently, growth is expected to be revived at a relatively faster pace going forward.

Given the above macroeconomic considerations, SBP Board of Directors has taken the following decisions effective from 25th May 2015:
  1. Ceiling rate of the interest rate corridor is reduced by 100 basis points from 8.0 percent to 7.0 percent.
  2. A new “SBP target rate” is set at 50 basis points below the ceiling rate. SBP will ensure that the overnight rate remains close to this target rate. This will be the main Policy Rate of SBP.
  3. Width of the interest rate corridor is reduced by 50 basis points from 250 to 200 basis points. Consequently, the floor rate is set at 5.0 percent."

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Central Bank News Link List - May 22, 2015: Yellen sees rate rise in 2015, gradual pace of tightening

May 22, 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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Sri Lanka maintain rates as inflation seen at low levels

May 22, 2015 by CentralBankNews   Comments (0)

    Sri Lanka's central bank maintained its benchmark policy rates, with inflation projected to "remain at low levels in the months ahead."
    The Central Bank of Sri Lanka, which cut its policy rates by 50 basis points in April, added that the recent US$ 400 million currency swap agreement with the Reserve Bank India had strengthened reserves and together with expected capital inflows, including tourism and workers' remittances, will improve the country's balance of payments during the year.
    Sri Lanka's consumer price inflation rate was steady at 0.1 percent in April and March, well below the bank's target of 3.0 to 5.0 percent, reflecting a downward revision in energy prices and lower prices of consumer items.
    The International Monetary Fund (IMF) forecasts average inflation this year of 1.7 percent, with inflation ending the year at 3.2 percent, and averaging 3.4 percent in 2016. Gross Domestic Product is projected to expand by 6.5 percent this year and beyond, down from 7.4 percent in 2014 and 7.2 percent in 2013.
    Sri Lanka's GDP expanded by an annual 6.4 percent in the fourth quarter of 2014, down from 7.7 percent in the third quarter.
     The central bank maintained its benchmark Standing Deposit Facility Rate (SDRF) 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:

"Monetary Policy Review May 2015 

Following the reduction in policy rates of the Central Bank in April 2015, market interest rates have adjusted downwards as expected. The continuation of the low interest rate regime has induced demand for bank credit from the private sector. Accordingly, credit obtained by the private sector from commercial banks increased by 13.9 per cent in March 2015 on a year-on-year basis. In absolute value terms, the increase during the month was Rs. 41.4 billion, raising the cumulative increase in credit to the private sector by commercial banks to Rs. 86.9 billion in the first quarter of 2015. As per the Quarterly Survey of Commercial Banks’ Loans and Advances to the Private Sector, the sustained expansion in credit was driven mainly by credit flows to the Industry and the Services sectors. Given continued low market interest rates, it is projected that private sector credit would increase further in the period ahead supporting the growth momentum of the economy. As a result of increased credit flows to both private and public sectors, broad money (M2b) grew by 12.5 per cent in March 2015 on a year-on-year basis, along the expected path for monetary expansion.

Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (CCPI), remained at 0.1 per cent in April 2015 unchanged from the previous month. Year-on-year headline inflation has remained below 1 per cent from February 2015 largely  reflecting the downward revision of domestic energy prices and the reduction in prices of selected consumer items. Annual average inflation declined further to 2.1 per cent in April 2015 from 2.5 per cent in the previous month. Meanwhile, core inflation, on a year-on-year basis increased to 2.4 per cent in April 2015 from 1.4 per cent in March, with price increases being recorded mainly in non-food items such as health services and clothing. Going forward, with improved domestic supply conditions and subdued prices of key commodities in the international market, it is projected that inflation would remain at low levels in the months ahead.

In the external sector, the recent currency swap agreement with the Reserve Bank of India amounting to US dollars 400 million has strengthened official reserves of the country. The realisation of expected capital inflows in the period ahead and sustained regular inflows in the form of earnings from the export of goods and services, including tourism and workers’ remittances would improve the balance of payments during the year. So far in 2015, the Sri Lankan rupee has depreciated against the US dollar by around 2.0 per cent.

In this background, the Monetary Board was of the view that the current monetary policy stance is appropriate. Accordingly, the Monetary Board, at its meeting held on 21 May 2015, 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)
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Standing Lending Facility Rate (SLFR)
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Statutory Reserve Ratio (SRR)

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UPDATE-This week in monetary policy: Indonesia, Nigeria, Turkey, South Africa, Japan and Pakistan

May 22, 2015 by CentralBankNews   Comments (0)

     (Following item has been updated to include Pakistan)
    This week (May 18 through May 23) central banks from six countries or jurisdictions are scheduled to decide on monetary policy: Indonesia, Nigeria  Turkey, South Africa, Japan and Pakistan.
    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.

INDONESIA EM UNCH. 7.50% 7.50% 7.50%
NIGERIA FM UNCH. 13.00% 13.00% 12.00%
TURKEY EM UNCH. 7.50% 7.50% 9.50%
SOUTH AFRICA EM UNCH. 5.75% 5.75% 5.50%
JAPAN DM UNCH.                  N/A                  N/A                  N/A
PAKISTAN FM CUT 23-May 8.00% 10.00%

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BOJ maintains stance, economy recovering moderately

May 22, 2015 by CentralBankNews   Comments (0)

    Japan's central bank maintained its target for boosting the country's monetary base by an annual 80 trillion yen and repeated its long-held view that the economy was "expected to continue recovering moderately."
    The Bank of Japan (BOJ), which last month pushed back its target for achieving 2 percent inflation and trimmed its growth forecast, also repeated that inflation, excluding the effects of last April tax rise, was around 0 percent but inflation expectations appeared to be rising.
    The BOJ embarked on "qualitative and quantitative easing" in April 2013 to rid the country of 15 years of deflation but last year's fall in oil prices has made it more difficult to boost inflation.
    In its quarterly update on April 30 the BOJ said it expects inflation to hit 2 percent in the first half of fiscal 2016, which begins on April 1 next year, instead of in the current fiscal year.
    The forecast for headline inflation for fiscal 2015 was trimmed to an average of 0.8 percent from the previous forecast in January of 1.0 percent and for fiscal 2016 inflation was seen hitting 2.0 percent, down from the previous forecast of 2.2 percent.
    In March Japan's consumer price inflation rate rose to 2.3 percent from February's 2.2 percent.
    Although the BOJ also cut its growth forecast, data this week showed first quarter 2015 growth above expectations, with signs of a pickup in exports and housing. Gross Domestic Product in the first quarter expanded by 0.6 percent from the fourth quarter of 2014 but on an annual basis, GDP still contracted by 1.4 percent, the fourth consecutive quarter of shrinkage.
    For fiscal 2015 the BOJ expects GDP growth of 2.0 percent, down from its January forecast of 2.1 percent, and growth in fiscal 2016 of 1.5 percent, down from the previous forecast of 1.6 percent.
    On Monday Eiji Maeda, the BOJ's chief economist, said the economy was likely to shift to an expansionary phase this fiscal year due to improving domestic demand, exports and the benefits from last year's decline in oil prices.
    In today's statement on monetary policy the BOJ said business fixed investment had been on a "moderate increasing trend," while public investment had entered a moderate declining trend, private consumption was resilient, housing investment had shown some signs of picking up and industrial production was rising.

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South Africa holds rate but to raise when appropriate

May 21, 2015 by CentralBankNews   Comments (0)

     South Africa's central bank held its benchmark repurchase rate steady at 5.75 percent but cautioned "the deteriorating inflation outlook suggests that this unchanged stance cannot be maintained indefinitely" and it is closely monitoring the outlook for inflation and "stands ready to act when appropriate."

    The Reserve Bank of South Africa issues the following statement by its governor, Lesetja Kganyago:

"The challenges facing monetary policy have persisted, and, as expected, the downward trend in inflation which was mainly attributable to the impact of lower oil prices, has reversed. Headline inflation is expected to breach temporarily the upper end of the target range early next year, and thereafter remains uncomfortably close to the upper end of the target band for most of the forecast period. The upside risks have increased, mainly due to further possible electricity price increases. The exchange rate also continues to impart an upside risk to inflation as uncertainty regarding impending US monetary policy continues. Domestic demand, however, remains subdued while electricity constraints continue to weigh on output growth and general consumer and business confidence.

The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas measured 4,0 per cent and 4,5 per cent in March and April respectively. The petrol price increase of R1,56 per litre in April resulted in a decline in the rate of disinflation from the transport category, from -5,0 per cent in March to -1,1 per cent in April, while food price inflation moderated further. The main contributions to the April headline rate came from the categories of food and non-alcoholic beverages, housing and utilities, and miscellaneous goods and services, which together accounted for 3,2 percentage points of the outcome. Core inflation, which excludes food, petrol and electricity, moderated from 5,7 per cent in March to 5,6 per cent in April.

Producer price inflation for final manufactured goods appears to have reached a low point in February at 2,6 per cent, following the 3,1 per cent outcome in March, higher than market consensus. While food price inflation moderated, the main upside contribution came from coal and petroleum products where disinflation slowed. The recent increase in international oil prices and higher agricultural crop prices, along with further electricity price increases from mid-year are likely to sustain the upward momentum.

The inflation forecast of the Bank has changed since the previous meeting of the MPC. Inflation is now expected to average 4,9 per cent in 2015, with a first quarter low of 4,1 per cent. A temporary breach of the upper end of the inflation target band is still expected during the first quarter of 2016, to peak at 6,8 per cent, and to decline to 6,0 per cent by the second quarter of that year. An average inflation rate of 6,1 per cent is forecast for the year. The forecast period has now been extended to the end of 2017, with an average inflation rate of 5,7 per cent expected for the year, and 5,6 per cent in the final quarter. 

The forecast for core inflation has also increased marginally, to 5,6 per cent in 2015, and to 5,4 per cent in 2016. Core inflation is expected to average 5,2 per cent in 2017, with a final quarter average of 5,1 per cent. Much of the persistence of core inflation at these levels is attributed to high levels of wage growth, currency depreciation and inflation expectations entrenched at the upper end of the target range.

The headline inflation forecast assumes electricity price increases of 13,0 per cent from July 2015 and July 2016 in line with the original multi-year price determination process of Nersa. However, the application by Eskom for a further 12,6 per cent increase from 1 July 2015 will be decided at the end of June. Given the uncertainty regarding this decision, both in terms of quantum and timing of implementation, it has not been incorporated into the forecast, but poses a significant upside risk. Should Nersa fully accede to the Eskom request, a higher peak of headline inflation as well as a more extended breach of the target can be expected. The direct and indirect effects of such an increase could increase average inflation by around 0,5 percentage points over a year.

The BER inflation expectations survey for the second quarter of 2015 will only be released in June. Median inflation expectations as reflected in the Reuters Econometer poll, at 4,9 per cent and 5,9 per cent for 2015 and 2016, are similar to the Bank’s forecast, although there is a fairly wide dispersion between respondents. The break-even inflation rates, as reflected in the yield differential between conventional bonds and inflation-linked bonds, have been more volatile, and are above the upper end of the target range over all maturities, having reversed their earlier declines this year.

The outlook for the global economy is broadly unchanged since the previous meeting of the MPC. The US growth forecast for 2015 has been revised down by about half a percentage point following the broad-based first quarter estimate of 0,2 per cent, although this deterioration is generally believed to be temporary. Growth of around 3,0 per cent is now expected in 2015, still above estimated potential. Eurozone growth has surprised on the upside, and while still relatively subdued at an expected 1,5 per cent for 2015, there are indications that the region is responding to the ECB monetary stimulus. Any possible fall-out from the debt crisis in Greece remains uncertain. Japan is expected to growth by just below one per cent this year.

Growth in some of the larger emerging markets remains weak. Negative growth is being experienced in Brazil and Russia, and although the Chinese economy is still slowing, with first quarter growth of around 5,3 per cent, a hard landing is not expected amid further monetary policy easing. By contrast, the Indian economy has been performing strongly, partly in response to policy reforms. While growth in Africa has remained relatively robust, downside risks have emerged in some of the oil and commodity-producing countries.
Global inflation remains benign, but the partial recovery in the international oil price has ameliorated the deflationary risks in some of the advanced economies in particular. Higher, but still low, inflation expectations contributed to a sharp rise in bond yields in some of the advanced economies, with spillovers to other bond markets. However, most central banks remain in loosening mode, with further reductions in policy interest rates in a number of countries since the previous meeting of the MPC. A notable exception has been Brazil, where monetary policy was tightened for the third time this year.

Global financial markets remain focused on the timing of US monetary policy tightening. Low inflation and the weaker first quarter growth outcome have pushed out expectations regarding the starting date, but financial markets generally expect the first move to be during 2015, most likely in September, followed by a gradual data dependent tightening cycle. Continued financial market volatility is likely to ensue with each relevant data release.
The uncertainty regarding US growth prospects contributed to a weakening of the dollar against most currencies in recent weeks. Since the previous meeting of the MPC the rand traded in a relatively narrow band of between R11,80 and R12,20 against the US dollar, and is currently almost unchanged since then. However, in line with dollar weakening, the rand has depreciated by 0,6 per cent against the euro and by 4,0 per cent against the pound sterling. On a trade-weighted basis, the rand has depreciated by 0,3 per cent.

The rand continues to be vulnerable to the ebbs and flows of global risk perceptions and associated capital flows, particularly in response to anticipated changes to US monetary policy. At the same time, there is a great deal of uncertainty regarding the extent to which US monetary policy normalisation has been priced into the rand. However, past patterns suggest that some further pressure is likely on the exchange rate and long bond yields as the start of the US tightening cycle becomes more certain. Reflecting this uncertainty, non-resident bond and equity flows have been quite volatile. According to JSE data, non-residents have been net buyers of bonds and equities to the value of around R15 billion since the beginning of this year.

The rand therefore remains an upside risk to the inflation outlook, although the degree of upside risk is tempered somewhat by the continued relatively low level of pass-through to consumer price inflation. The Bank estimates that the actual pass- through could be about half of what is currently implied in the forecast model, but it is still uncertain as to whether this reflects a permanent change or a temporary phenomenon which can reverse rapidly.
The domestic growth outlook remains weak, amid continued electricity supply constraints and low and declining levels of business and consumer confidence. The Bank’s forecast for GDP growth is marginally down from the previous forecast: growth is expected to average 2,1 per cent and 2,2 per cent in 2015 and 2016, and to increase to 2,7 per cent in 2017. 

Growth for the next two years therefore is expected to be more or less in line with our estimate of short-term potential output growth of between 2,0 and 2,5 per cent. It also suggests that the negative output gap, currently estimated at around 1,5 per cent, is likely to persist. This forecast makes an assumption regarding the persistence of electricity shortages, which are expected to be relieved somewhat only in 2017. However, the risks to growth are assessed to be on the downside. The moderate decline in the Bank’s composite leading business cycle indicator also suggests a continuation of the sluggish growth outlook. 

Despite a strong performance by the mining sector in March, first quarter growth is expected to be subdued and much lower than the 4,1 per cent measured in the fourth quarter of 2014. According to Statistics South Africa, the physical volume of mining output increased at a quarter-to-quarter rate of 1,9 per cent in the first quarter. Platinum group metals output was particularly strong in March with a month- on-month increase of 26,6 per cent. By contrast, manufacturing output appears to have contracted by about 0,6 per cent in the quarter, consistent with the continued decline in the Kagiso PMI, down to 45,4 index points in April, and the slight decline in capacity utilisation in the manufacturing sector. The real value of building plans passed declined for a fourth successive month in February, in line with a weaker FNB/BER Building Confidence index in the first quarter of the year.

Consumption expenditure by households is expected to remain relatively subdued, as higher personal tax rates take effect and the benefits of lower petrol prices dissipate. There are mixed signals from the retail trade sales which rebounded strongly in February but then contracted in March on a month-on-month basis. A quarterly growth rate of 0,9 per cent was recorded in the first quarter of 2015. Growth in expenditure on durable goods in particular is expected to decline, as reflected in the sluggish new vehicle sales, which decreased further in April. The FNB/BER consumer confidence index declined sharply in the first quarter of 2015, signalling modest growth in consumption expenditure going forward.

Subdued levels of household consumption expenditure are reflected in credit extension by banks to households, where the divergence between households and corporates continues. Growth in credit extension to the corporate sector was 13,9 per cent in March 2015, compared with 3,6 per cent to households. The latter is reflective of continued weak growth across all the main categories of credit, influenced by both supply and demand factors. These trends are likely to be reinforced further by the implementation of affordability assessment regulations as part of revisions to the National Credit Regulations in March. The impending changes in the Basel III regulatory requirements are also contributing to relatively tight credit conditions. At the same time, weak employment growth, high debt levels and continued household deleveraging, as well as expectations of higher interest rates may have impacted on the demand for credit.

Trends in remuneration growth remain a concern to the MPC. Average wage and salary growth has been in excess of inflation for some time, imparting some degree of automatic indexation to wage settlements, and therefore maintaining higher levels of inflation. In the fourth quarter of 2014, year-on-year growth in nominal remuneration per worker in the non-agricultural formal sector increased by 7,7 per cent. Once accounting for labour productivity growth of 1,3 per cent, unit labour costs showed an increase of 6,3 per cent, from 5,7 per cent in the previous quarter. According to Andrew Levy Employment publications, the average wage settlement rate in collective bargaining agreements measured 7,9 per cent in the first quarter of 2015. The public sector wage settlement appears to have been settled at an increase of 7 per cent, but the full impact on the total government wage bill is still unclear. Upside risks to inflation from wage pressures are still expected, with the unresolved settlements in the coal and gold mining sectors of particular concern. 

While high wage settlements could underpin household consumption expenditure, this could be offset in part by inevitable reductions in employment.

Food price inflation is expected to contribute to upside inflation pressures. This is despite the continued moderation of global food prices and a recent declining trend of food price inflation at the CPI level and lower meat price inflation at the producer price level. Food price inflation measured 5,0 per cent in April following eight successive months of moderation. Similarly, final manufactured food producer price inflation moderated to 5,8 per cent in March. However, domestic drought conditions have resulted in a need to import yellow maize, contributing to maize prices rising close to import parity levels. These pressures, along with the weaker exchange rate, are expected to reverse the favourable trend in food price inflation by the second half of this year.

The international oil price appears to have stabilised in the US$60-US$70 per barrel range, as capital expenditure plans have been scaled back following the collapse of prices in the later part of last year. Since the previous meeting of the MPC, Brent crude oil prices have increased by about US$10 per barrel. Domestic petrol prices remained unchanged in May, but a further increase of around 50 cents per litre, should current trends persist, is likely in June, attributable mainly to higher international product prices. 
Although the upward revision of the inflation forecast was relatively small, the persistence of medium term inflation at elevated levels and the deteriorating risks to the outlook are an increasing concern to the MPC. While currently the breach is expected to be temporary, the longer term trajectory is close to the upper end of the target range, and the upside risks make this trajectory vulnerable to any significant changes in inflation pressures.

The main risks to the outlook remain electricity tariff increases, the exchange rate and wage settlements. Significant additional electricity tariff increases are likely to cause inflation to diverge significantly from the target range for a more extended period than our baseline forecast suggests. The rand remains vulnerable to global market reaction to US policy normalisation, particularly in the context of South Africa’s twin deficits. Any significant weakening of the exchange rate in reaction to US monetary policy tightening could cause inflation to diverge even further from target, and set in motion an exchange rate-inflation spiral. Furthermore, the possibility of a wage-price spiral, should settlements well in excess of inflation become an economy-wide norm, also poses a risk to the outlook.

The MPC recognises that domestic inflation is not driven by demand factors that are more easily dealt with through monetary policy responses. Household consumption expenditure remains relatively subdued. While monetary policy should generally look through supply side shocks, such as large electricity tariff increases and oil price changes, we have to be mindful of the second-round effects of such shocks. In particular, we need to monitor closely the possible impact on inflation expectations which remain uncomfortably close to the upper end of the target range over the longer term. 

Growth remains fragile, constrained by electricity shortages and low business confidence and the risk to the outlook remain on the downside. But this cannot be solved by monetary policy alone. Monetary policy action will need to achieve a fine balance between achieving our primary mandate of price stability and not undermining growth unduly.

The MPC has decided to keep the repurchase rate unchanged at this meeting. Four members of the committee favoured an unchanged stance while two favoured a 25 basis point increase. The deteriorating inflation outlook suggests that this unchanged stance cannot be maintained indefinitely. The MPC will continue to closely monitor the evolution of inflation expectations and other factors that could undermine the longer term inflation outlook and stands ready to act when appropriate.

From the next meeting in July the Bank will take further steps to increase transparency by publishing the assumptions underlying the Bank’s forecast with the MPC statement. "

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Is China Under The Skyscraper Curse?

May 21, 2015 by EconMatters   Comments (0)

By EconMatters

Shanghai Tower (Center), Source:

China Builds World's 2nd Tallest Skyscraper

The world's 2nd tallest skyscraper, Shanghai Tower, at Lujiazui, Pudong, Shanghai, China is to open to the public in a month or two (mid-2015). It measures 2,073 feet with 128 stories in the financial district of Shanghai, only surpassed by Burj Khalifa in Dubai at 2,722 ft.

Once the building is completely open, it is expected 20,000 to 30,000 people will pass through each day.  It was built for about $3 billion by the Shanghai Tower Construction and Development Co., a state-owned enterprise.

Loved By Asia & Middle East  

In recent years, skyscraper seems to serve more of a symbolism of status rather than an actual real estate commercial project.  In the case of Shanghai Tower, special computerized damper, and other additional special designs have to be implemented to prevent the building from swaying in heavy winds from, for example, typhoons.   In all Shanghai Tower, there are 21 sky lobbies (mostly public spaces) that can't be rented out to make money.  So basically these types of design elements would never make the ROI economics and be constructed in the United States.

This is probably part of the reason why skyscrapers are dwindling in the more developed regions like Europe and North America while regions with greater State wealth and authority like Asia and the Middle East, seem to have developed an affinity (see chart below).    

Chart Source: Zero Hedge

Skyscraper Index Curse?
Back in 2010, China commissioned and put a replica of the Wall Street bull in Pudong, Shanghai to stake its rightful place on the global financial stage as an equal to New York.  A skyscraper just seems a natural follow-up 5 year later.  However, Shanghai Tower will not stay as the tallest building in China for very long, Shenzhen's 2,170-ft Ping An Finance Center will surpass the Shanghai Tower when it is completed in 2016. 
Chart Source:

Nevertheless, the fact is that Shanghai Tower is opening during the darkest period of China's economy in recent years.  This make me wonder if the skyscraper index which showed that the world's tallest buildings have risen on the eve of economic downturns (see graph above) could have some predictive value than mere coincidence.

For example, Taipei 101 was the tallest building in the world before Burj Khalifa came along in 2010, but till this day, many in Taiwan still believe the erection of Taipei 101 negatively affected the island's 'natural flow of prosperity'.  Dubai economy has not fared well after Burj Khalifa either.  With a similarly deep cultural root in symbolism and Fengshui, it is no wonder that Sky City, the planned skyscraper taller than Burj Khalifa in Changsha, Hunan in south-central China has never got off ground.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle

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