monetary policy

After long discussion, a battle in India’s government between the imperatives of boosting the economy and supporting the currency has been decided.

Late on Monday, the Reserve Bank of India (RBI) announced a package of measures to tighten liquidity. It hopes to stem the depreciation of the rupee and prevent its current account deficit from spiralling out of control – but it has done so at the risk of limiting India’s already meager economic growth. 

Quantitative easing was a big factor behind growth in emerging markets after the 2008-09 crisis. And when Ben Bernanke, chairman of the US Federal Reserve, suggested last month it may be about to end, he triggered a big sell-off in EM assets.

So when Bernanke declared on Wednesday evening that “highly accommodative monetary policy” was here for the foreseeable future, it was no surprise that his comments delivered a bounce in EM markets.

But it is unlikely that EM central bankers are heaving a collective sigh of relief. Monetary policy in emerging markets has become much less dependent on Fed policy than you might think. 

Squeeeeeeze

It’s deliberate. To all intents and purposes, the Chinese authorities on Wednesday confirmed that the cash crunch squeezing the country’s banks is no market aberration but the result of considered central bank action.

By consistently withholding funding from banks, the People’s Bank of China has for the past two weeks been driving up short-term interest rates and putting pressure on overextended lenders. And there is no sign of it relenting. 

The Reserve Bank of India on Monday kept its key benchmark lending rate unchanged at 7.25 per cent. While it might have wanted to continue with recent cuts to boost a flagging economy, the plunge in the rupee left the central bank with little choice. 

Russian central bank governor Sergey Ignatyev on Monday completed his last rate-setting meeting with his hawkish reputation intact.

In line with expectations, the bank left key policy rates on hold, though it eased medium-term borrowing costs in a move which was seen a a signal of a coming relaxation in monetary policy. 

By Shang-Jin Wei of Columbia Business School

The Chinese central bank has recently dropped hints that it will quicken the pace of interest rate liberalisation. This has raised hopes for everything from improving efficiency to reducing China’s “excessive” savings and current account surplus.

However, to improve efficiency, this reform alone is insufficient, and complementary reforms outside the central bank’s controls must be undertaken in concert. The hopes for a much reduced current account surplus from this reform are misplaced and will be dashed. 

Serbia took another bold step in monetary easing on Thursday, cutting interest rates against expectations – and contrary the advice of the IMF, which is watching Belgrade closely and may need to support the vulnerable economy.

The National Bank of Serbia (NBS) cut its repo rate by 25 basis points to 11.00 per cent, citing the expectation that consumer price inflation would fall into its target range of 4 per cent plus/minus 1.5 per cent by October. Investors reacted sceptically, with the dinar falling to 114.4 to the euro, down 1.4 per cent on the day, despite the central bank intervening. 

Brazil’s cutting its IOF financial transaction tax to zero for foreign investments in local bonds makes perfect sense. The logic of its introduction, after all, was that Brazil faced a tsunami of hot money inflows as a result of the developed world’s aggressively loose monetary policies following the crisis of 2008-09. Those inflows made the currency stronger and eroded Brazil’s competitiveness. It needed a flood barrier. Now that the tide of those flows has turned, the obvious response is to take the barrier away.

If only things were that simple. 

With Poland’s economy slowing rapidly the central bank on Wednesday cut interest rates by a quarter point to a record low of 2.75 per cent in line with market expectations.

It was the latest in a series of reductions that has seen the bank’s benchmark rate come down from 4.75 per cent towards the end of last year. 

As African central bank governors go, few have a higher profile than Lamido Sanusi – and few have courted more controversy. Appointed in the midst of a debt crisis in 2009, his bold moves to fix Nigeria’s crisis-stricken banks toppled the chief executives of eight local lenders, and he’s not one to tiptoe around the political elite either.

 

Serbian customer takes money from an ATM in BelgradeSerbia’s first interest rate cut in 17 months is more dramatic than expected as the central bank looks to encourage a sluggish economy and bets that a recent inflation spike is temporary. But consumer price growth may still come in at double digits for 2013.

The National Bank of Serbia (NBS) this week cut its repo rate by 50 basis points to 11.25 per cent, more than the 25-point reduction forecast by a Bloomberg survey and other analysts. 

In announcing a surprise rate cut on Thursday, South Korea’s central bank mentioned the yen only once in a statement of 523 words.

Governor Kim Choong-soo and his colleagues were probably just being polite in not pointing the finger at Tokyo. But it’s likely that the Japanese currency’s plunge on the forex markets looms much larger in their minds that the word-count suggests. Just look at the chart: perhaps Seoul might have held fire if the yen-won rate had stabilised in April. The latest drop in the Japanese currency may have pushed the central bank into action. 

Poland’s slowing economy prompted the central bank’s Monetary Policy Council to cut rates by a quarter point to a record low of 3 per cent on Wednesday, surprising a majority of analysts who had expected the council to stay put after a recent easing cycle that had seen the bank’s benchmark rate come down from 4.75 per cent near the end of last year

Poland’s central bank on Wednesday surprised the markets with a 25 basis-point cut in its benchmark interest rate to a record low of 3 per cent.

The bank had said that it was all but finished with rate cuts after reductions totalling 150 basis points. But clearly the latest evidence of economic slow down has disturbed and worried policymakers. 

Russia’s consumer inflation rate picked up in April, with the headline figure rising to 7.2 per cent from 7.0 per cent. That’s hardly hardly shocking.

But it’s still enough to make it harder for the central bank to cut interest rates to boost flagging economic growth. Its next rate-setting meeting is next week.