Global monetary policy in July was characterized by tightening by several major emerging market central banks as they responded to a fall in their currencies and a likely build up in inflationary pressures following the U.S. Federal Reserve’s plan to reduce asset purchases later this year.
The rise in policy rates by Indonesia, Brazil Zambia and Bulgaria and other tightening measures by Turkey and India is unlikely to signal an immediate reversal of this year’s trend toward lower policy rates as global economic growth is still weak and inflation low, allowing for further rate cuts.
However, it is clear that this year’s trend toward lower rates is slowing as global economic prospects look to be improving. Europe, the global economy’s Achilles heel in recent years, appears to be turning the corner, the U.S. economy is continuing its slow but steady expansion, Japan may finally be putting two decades of stagnation behind it and China’s slowdown may be bottoming out.
For the third month in a row the Global Monetary Policy Rate (GMPR) – the average policy rate of the 90 central banks followed by Central Bank News – was steady at 5.65 percent in July, the same as in June and May.
This compares with a GMPR of 5.77 percent in April, 5.85 percent in January and a 2012 average policy rate of 6.2 percent.
The initial effect of the outflow of capital from major emerging markets, which followed a reassessment of global risks, was to take rate cuts off the agenda for several emerging market central banks, especially those like India and Turkey that are struggling with current account deficits and weakening economic growth.
Brazil, Indonesia and Zambia were already heading down the path of tightening so currency depreciation just added fuel to the fire. Brazil had already raised rates in April and May, Indonesia was expected to tighten due to inflationary pressures from a long-awaiting government move to scrap fuel subsidies, and Zambia had already raised rates in June to contain inflation.
The four rate increases in July by Indonesia, Brazil, Zambia and Bulgaria totaled 126 basis points. This compares with rate cuts of 190 basis points by six central banks, the lowest number of monthly rate cuts so far this year.
In total, global policy rates were cut by a net 64 basis points in July, sharply below cuts of 476 points in June or 749 points in April, the highest in any month this year. The central banks that cut rates in July included Hungary, Poland, Albania, Latvia, Tajikistan and Romania.
Other signs pointing to a coming trend reversal came from New Zealand’s central bank which surprisingly adopted a tightening bias, putting it on course to become the first developed market central bank to raise rates since early 2011.
GLOBAL MONETARY POLICY RATES (GMPR)
(Changes in July 2013 and year-to-date, in basis points)
| COUNTRY | MSCI | JULY | YTD |
| RATE CUTS: | |||
| BELARUS | -650 | ||
| SIERRA LEONE | -500 | ||
| MONGOLIA | -275 | ||
| KENYA | FM | -250 | |
| VIETNAM | FM | -200 | |
| HUNGARY | EM | -25 | -175 |
| POLAND | EM | -25 | -175 |
| GEORGIA | -125 | ||
| BOTSWANA | -100 | ||
| COLOMBIA | EM | -100 | |
| MOLDOVA | -100 | ||
| TURKEY | EM | -100 | |
| UGANDA | -100 | ||
| INDIA | EM | -75 | |
| ALBANIA | -25 | -50 | |
| ISRAEL | DM | -50 | |
| JAMAICA | -50 | ||
| LATVIA | -50 | -50 | |
| MEXICO | EM | -50 | |
| MOZAMBIQUE | -50 | ||
| PAKISTAN | FM | -50 | |
| RWANDA | -50 | ||
| SRI LANKA | FM | -50 | |
| UKRAINE | FM | -50 | |
| TAJIKISTAN | -40 | -40 | |
| ANGOLA | -25 | ||
| AUSTRALIA | DM | -25 | |
| AZERBAIJAN | -25 | ||
| EURO AREA | DM | -25 | |
| MACEDONIA | -25 | ||
| MAURITIUS | FM | -25 | |
| ROMANIA | FM | -25 | -25 |
| SERBIA | FM | -25 | |
| SOUTH KOREA | EM | -25 | |
| THAILAND | EM | -25 | |
| WEST AFRICAN STATES | -25 | ||
| BULGARIA | FM | 1 | -1 |
| SUM: | 190 | -3741 | |
| RATE INCREASES: | |||
| TUNISIA | FM | 25 | |
| EGYPT | EM | 50 | |
| ZAMBIA | 25 | 50 | |
| INDONESIA | EM | 50 | 75 |
| GHANA | 100 | ||
| BRAZIL | EM | 50 | 125 |
| GAMBIA | 600 | ||
| SUM: | 126 | 1025 | |
| NET CHANGE: | -64 | -2716 |
