Iceland Central Bank holds Monetary Policy rates in the 4th week of May

21st May 2014

Iceland's central bank maintained its policy rates and cut its inflation forecast but raised the growth forecasts, saying "whether a change in the Bank's nominal interest rates is warranted in the near future will depend on the future path of inflation and inflation expectations."
    In March the Central Bank of Iceland, which has held its benchmark seven-day lending rate at 6.0 percent since November 2012, toned down earlier warnings of the need for tighter monetary policy due to stronger-than-expected economic growth.
     And while the central bank raised its growth forecast in its latest monetary bulletin, inflation and inflationary expectations have declined with the result that the bank's real effective interest rate has risen "markedly" and the previous slack in the monetary stance "has probably disappeared."
    Iceland's headline inflation rate fell to 2.3 percent in April and averaged 2.5 percent in the first quarter compared with a first quarter 2013 average of 4.3 percent and 6.4 percent in first quarter 2012. The central bank targets inflation of 2.5 percent.
    The Bank's effective real interest rate is about 3.0 percent, up just under one percentage point in the past year and above the rate in other industrialized countries. Financial markets have adjusted to this, the bank said, primarily because long-term inflation expectations are not yet firmly anchored.
    The central bank revised down its inflation forecast for 2014 to 2.5 percent from its February forecast of 2.7 percent, the 2015 forecast to 3.1 percent from 3.4 percent, but raised the 2016 forecast to 3.3 percent from 3.2 percent.
    The improved inflation outlook is mainly due to the stronger Icelandic krona and smaller rises in labour costs than previously expected.
    Short-term inflation expectations have also declined by about one percentage point with a March survey of business executives projecting inflation two years ahead at 3.5 percent, the lowest survey valued since autumn 2008. But long-term inflation expectations have been more persistent, the bank said, with the 10-year rate of about 4.0 percent, broadly unchanged since February and May 2013.
    The central bank expects economic slack to disappear by mid-2014, with inflation beginning to inch up as the year progresses, rising above 3.0 percent in the first half of 2015 when the effects of the appreciation of the krona will have tapered off and a positive output gap developing.
    The central bank revised upwards its growth forecast, with Gross Domestic Product now seen expanding by 3.7 percent this year, up from 2013's growth of 3.3 percent and the February forecast of 2.6 percent.
    GDP growth in 2015 is seen at 3.9 percent, up from 3.7 percent, while the 2016 growth forecast was revised down to 2.7 percent from 3.0 percent.
    Although the central bank assumes that wage agreements from late last year will apply to most of the labour market, it said there was still some unrest in the market, causing uncertainty.
    Higher economic growth could require increases in the bank's interest rates, but other measures, including tight fiscal policy, would help ease the need for tighter monetary policy and also help raise the national savings rate and lead to a more favorable current account balance, the bank said.
    The bank's monetary policy committee has recently discussed changes to its policy instruments to improve liquidity management and help prepare for the liberalization of capital controls and the sale of central bank assets.
    The bank has now decided to discontinue weekly sales of 28-day certificates of deposits, replacing them with two types of deposits that will be eligible as collateral for loan facilities. Each week, term deposits of one week will be offered at a fixed rate and each month the bank will offer term deposits of one month in an auction. The first auction will be June 4.
    Iceland is still trying to exit capital controls that were imposed in 2008 after the collapse of the country's three biggest banks led to a plunge in the krona currency and the worst recession in six decades.
    But last year the krona rose 10 percent against the U.S. dollar and this year it has continued to rise, though at a slower pace than last year.
    Today the krona was quoted at 112.6 to the dollar, up 2.1 percent since the start of the year, with the continued rise in foreign tourists and the external trade surplus helping shore up the currency. The central bank has taken a more active role since last May by intervening in foreign exchange markets.

Iceland holds rate, raises growth, cuts inflation forecasts - Central Bank News

Armenia Central Bank cuts Interest rates 25 bps in the second week of February

11th February 2014

Armenia's central bank cut its rate by a further 25 basis points to 7.5 percent, its third rate cut since November, as inflation has declined faster than expected due to low economic activity and lower international food prices.
    The Central Bank of Armenia (CBA) cut its rate by 50 basis points in November and then another 25 points in December, changing course after raising its rate in August by 50 basis points. In December the CBA said monetary policy would be weakened further in 2014.
    Armenia's inflation fell to 5.5 percent in January from 5.56 percent in December, hitting the CBA's upper limit of its inflation target. The central bank targets inflation in a range of 5.5 percent to 2.5 percent around a midpoint of 4.0 percent.
    The bank said its board believes that inflation will continue to decline over the next 12 months, hitting the lower border of its range by the third quarter, erasing the impact of higher energy prices in July. It does not expect any inflationary pressures from the external sector.

    Economic growth remains low, the central bank said, although improving in the fourth quarter and should improve further on the back of the bank's rate cuts and an expected expansion of fiscal policy in the second half of this year and private investment.
    Armenia's headline deficit is projected to rise to 2.3 percent of Gross Domestic Product in 2014 from less than 1.0 percent in 2013 and then ease to 2.0 percent in 2015.
    In the third quarter of 2013, Armenia's GDP expanded by an annual 1.4 percent, up from 0.6 percent in the second quarter.
    Last week the International Monetary Fund and Armenia agreed on an IMF credit of up to US$125 million.


Armenia cuts rate 25 bps on swift decline in inflation - Central Bank News

South Africa Central Bank holds rate, inflation will determine next move

South Africa's central bank held its benchmark repurchase rate steady at 5.0 percent, as widely expected, saying upside risks to inflation from a lower exchange rate was limiting its ability to ease policy and stimulate a weak economy, and the outlook for inflation would determine its policy stance.
    The South African Reserve Bank (SARB), which is facing the uncomfortable combination of rising inflation and slowing growth, said that at this stage "a sustained breach of the inflation target is not our central forecast. However, we are concerned about the revised higher trajectory of core inflation and macroeconomic vulnerabilities that are increasingly evident."
    Gill Marcus, governor of SARB, said the bank's policy committee was mindful of these conflicting pressures and its policy would be "highly dependent on how we see the inflation trajectory unfolding in this very uncertain environment. In other words, it has become even more data dependent."
    SARB revised its growth forecast downward and its inflation forecast upward.
    SARB, which targets inflation of 3.0-6.0 percent, said the outlook for inflation had deteriorated since May and it now expects average inflation of 5.9 percent this year, up from a previous forecast of 5.8 percent, 5.5 percent in 2014, up from 5.2 percent, and 5.2 percent in 2015, up from 5.0 percent.

    "The deterioration is mainly due to continued currency weakness and higher-than-expected petrol price increases," SARB said, adding that inflation is expected to breach the upper end of its target in the third quarter of this year - an average level of 6.3 percent from 6.1 percent - but then return to the target range by the fourth quarter of this year. 
    South Africa's headline inflation rate eased to 5.6 percent inflation in May from 5.9 percent in April, March and February, but SARB said this was likely a temporary decline as a 73 cent cut in petrol prices in May had been reversed by an 84 cent increase in July.

     The central bank's policy committee again revised its 2013 growth forecast down to 2.0 percent this year, from a 2.4 percent forecast, and to 3.3 percent in 2014 from a previous forecast of 3.5 percent.
    "The downside risk to growth has already resulted in the Bank being more tolerant of inflation at the upper end of the target range than would normally have been the case, an approach that is consistent with a flexible inflation targeting framework," Marcus said.
    Economic growth is expected to improve in 2015, with the economy expanding by 3.6 percent, down from a previous forecast of 3.8 percent. In 2012 South Africa's Gross Domestic Product grew by 2.5 percent and SARB last cut its policy rate by 50 basis points in July 2012.
    "The risks to the outlook are still assessed to be on the downside, particularly in the face of further delays in overcoming electricity supply constraints," Marcus said.

    South Africa's economy lost steam in the first three months of this year, with GDP expanding by only 0.9 percent from the previous quarter,  the lowest quarterly growth rate in almost four years. On an annual basis, GDP expanded by 1.9 percent, down from 2.5 percent in the fourth quarter.

    But SARB's ability to boost growth is limited by inflation and Marcus said the main risk to the inflation outlook comes from exchange rates and "much will depend on the strength of the pass-through to inflation, which to date has been relatively muted."

    "However, the risk remain that these pressures could be mounting, particularly if further currency weakness occurs and affects inflation expectations, which are currently anchored at the upper end of the target range," she said, adding that the outcome of the present round of wage talks will be critical in determining how much wage pressure would impact the inflation outlook.
    South Africa's rand has been under pressure since mid-2012 when labour unrest and high wage demands in the mining sector started to undermine the confidence of investors. The rand was also caught up in the general fall in emerging market currencies in May in response to fears of a tightening of U.S. monetary policy.
    Since May, the volatility of the rand's exchange rate has increased, trading between 10.36 and 9.60 to the U.S. dollar, and since the start of the year it has declined by 14.2 percent agains the dollar.
    Marcus said the relatively muted pass-through to inflation of the depreciation in the rand was likely due to weak pricing power as economic growth is low

South Africa holds rate, inflation will determine next move - Central Bank News

For more details log on to South African Reserve Bank website : http://www.resbank.co.za/Pages/default.aspx  

Mexico Central Bank holds rate steady as downside growth risks rise

Mexico's central bank held its benchmark target for the overnight rate steady at 4.0 percent, saying this policy stance is consistent with a lack of inflationary pressures,  slower economic growth and the fragile and volatile international financial markets.
   
 The Bank of Mexico, which cut its rate in March, said recent information suggest that the economic slowdown since the second half of last year "worsened significantly" in the second quarter of this year, reflecting lower exports and weak domestic spending.
    Like other emerging market economies, Mexico's peso has depreciated in recent months due to expectations of changes to U.S. monetary policy and long-term interest rates have "increased considerably," increasing the downside risks to Mexico's economy, the bank said.
    However, the central bank said the rise market interest rates and the decline in the peso had been in an orderly fashion and economic activity is expected to improve in the next half year, a slightly less pessimistic outlook than in its previous statement from June.
    Although the fall in peso will generate some inflationary pressures, the central bank was not overly concerned and said the overall balance of risks to inflation had improved with the slack in the economy limiting the transfer of exchange rate changes to overall prices.

    Mexico's inflation rate eased to 4.09 percent in June from 4.63 percent in May, and the central bank - known as Banxico - said it expects the downward trend to continue in coming months with inflation between 3 and 4 percent in the third and fourth quarters of this year.
    Next year, inflation is expected to be "very close to 3 percent" - the central bank's target - the same forecast the bank gave in June.
    Mexico's peso rose gradually in the first four months of the year but from early May to late June it fell by 10 percent against the U.S. dollar, along with other emerging market currencies, as major investors re-evaluated their exposure to riskier markets, withdrawing capital.
    But since June 24, Mexico's peso has rebounded and is largely unchanged from the beginning of the year, quoted at 12.82 to the U.S. dollar today compared with 12.84 on January 1.
    Mexico's economy slowed sharply in the first quarter with Gross Domestic Product up by only 0.45 percent from the fourth quarter, and annual growth of only 0.8 percent, down from a rate of 3.2 percent in the previous quarter, the slowest rate since the 2009 recession

Mexico holds rate steady as downside growth risks rise - Central Bank News

for more details log on to Bank of Mexico website : http://www.banxico.org.mx/indexEn.html