Monetary Policy Week in Review – Apr 13, 2013: Markets digest BOJ easing as 7 central banks hold rates and 1 cuts

    Last week eight central banks took policy decisions with only one (Mongolia) cutting its rate while the other seven banks (Poland, South Korea, Indonesia, Serbia, Chile, Peru and Pakistan) kept rates on hold as markets continued to digest the Bank of Japan’s unprecedented monetary easing.

    Singapore’s Monetary Authority, which uses the exchange rate rather than interest rates to control inflation, also left its monetary policy stance unchanged.

    Global policy makers, such as the Federal Reserve’s Ben Bernanke and Christine Lagarde of the International Monetary Fund, have generally welcomed the BOJ’s expansionary move as a welcome contribution to global economic growth.

    Stocks markets have also rejoiced while currency markets have pushed down the value of the yen further, a move that may cause friction among Japan’s competitors, especially in Asia.

    Some of the additional money being pumped into Japan’s economy will also find its way into higher-yielding currencies, presenting central banks in those countries with the challenge of managing the inflows to avoid domestic asset bubbles and currency appreciation. 

    Central banks in South America, such as Peru and Brazil, have been tackling these challenges for some time now and at meeting in Rio de Janeiro 10 of the region’s central banks said they were paying “special attention” to global liquidity.

    In its statement this week, the Central Bank of Chile again referred to an appreciation of its peso but did not sharpen its language from last month. This was viewed as a signal by the central bank that it is concerned over the currency’s level though not worried enough to start intervening, as it last did from January through December 2011.

    In addition to Chile, which merely said Japan’s quantitative easing was reflected in a depreciation of the yen, South Korea’s Monetary Policy Committee didn’t mince words, saying the weak yen would contribute to the country’s negative output gap.

    However, in its latest economic outlook, the Bank of Korea’s staff was more balanced, referring to both pluses and minuses from Japan’s move.

    Posing an upside risk from Japan’s move, the BOK outlook said economic growth could be stronger than expected while uncertainty surrounding the value of the yen – diplomatic words for depreciation – posed a downside risk to growth.

    The BOK surprised many observers by holding rates steady last week despite the confidence-sapping, sabre-rattling by its northern neighbor and a cut in its growth forecasts. But the bank argued that it was keeping a close eye on the geopolitical risks and the economy was continuing to grow, albeit at a weak level.

    Pakistan’s central bank laid out its balancing act succinctly. A decline in inflation has given it room to cut rates except for the fact that a rate cut could encourage an outflow of “speculative” capital that is dearly needed to repay foreign loans, including to the International Monetary Fund.

    Through the first 15 weeks of this year, 77 percent of the 141 policy decisions taken by the 90 central banks followed by Central Bank News have lead to unchanged rates, the same ratio as after the first 14 weeks.

    In fact, this ratio has remained largely stable this year, illustrating how many central banks – excluding those in the major advanced economies – find themselves in a bit of a sweet spot: Economic activity is slowly strengthening while weak global demand is keeping inflation under control. 

    Globally, 19 percent of policy decisions this year have lead to rate cuts – largely by central banks in emerging economies and Japan as the first central bank in developed markets – down from 20 percent last week.

    Of the 27 rate cuts worldwide so far this year, 37 percent have come from central banks in emerging markets, while banks in other unclassified markets, such as Mongolia last week and Georgia in the previous week, have accounted for 44 percent of the cuts.

LAST WEEK’S (WEEK 15) MONETARY POLICY DECISIONS:

NEXT WEEK (week 16) features five central bank policy decisions, including Sri Lanka’s meeting that had been tentatively scheduled for last week, Turkey, Brazil, Sweden and Canada.