Global Central Banking in 2014, A Second Quarter Update for 24 Economies – Real Time Economics

Five years after the global recession of 2009, economic growth remains troublingly weak and inflation uncomfortably low in many developed economies. Several emerging-market economies are expanding more slowly than in the past while inflation remains high. And housing prices appear frothy in some countries. Many of the world’s central banks held policy steady in the second quarter, but some made moves or indicated they are preparing to act in the months ahead.

The European Central Bank and the central banks of Mexico and Turkey were among those that cut interest rates in the April through June period. The central banks of Russia and New Zealand raised rates. The Bank of England sent signals it may this year become the first major advanced economy central bank to raise rates from record lows. And U.S. Federal Reserve officials kept winding down their bond-buying program while discussing how to raise rates when the time comes, with most expecting to start next year.

Here’s a guide to the individual outlooks for central banks around the world, compiled by our global staff of reporters and editors. Click on the links below if you want to read just a few, or read them all for fun. And if you want a daily dose, sign up for Grand Central, our email roundup of news on global central banks.

U.S. Federal Reserve

By Pedro Nicolaci da Costa

The U.S. Federal Reserve spent most of the past three months on de facto cruise-control, reducing its monthly bond buys by $10 billion per meeting and promising to keep rates low for a long while. But Fed officials have been busy discussing when and how to start raising interest rates when the time comes.

Fed officials’ projections, released at their June meeting, showed 12 out of 16 of them expect to start raising short-term rates from near zero next year. Many economists and market participants expect the first hike sometime in the summer of 2015.

The question of how to raise rates is more complicated. Fed officials are experimenting with different tools but haven’t decided which to use, in what order, or how to possibly combine them. Fed Chairwoman Janet Yellen, asked about the topic at her June press conference, indicated the issue is still up in the air. “We’ve made quite a lot of progress in our discussion, but we’ve not yet reached conclusions,” she told reporters.

Before the financial crisis and recession, the Fed simply adjusted its benchmark federal funds rate to affect borrowing costs throughout the economy. Fed officials are now considering other ways of influencing short-term rates either instead of or along with the fed funds rate. One tool is the rate the Fed pays banks to park excess reserves at the central bank overnight. Another is the rate the Fed pays on large reverse repurchase agreements with other financial firms, a program in testing since September. Ms. Yellen emphasized “these discussions are in no way intended to signal any imminent change in the stance of monetary policy.”

So what is the Fed’s underlying message? Policy makers are content with the economy’s progress and expect it will be sturdy enough next year to withstand slightly higher interest rates. But Ms. Yellen repeated the word uncertainty several times during her press conference, emphasizing the policy-setting Federal Open Market Committee “will adjust policy to what it actually sees unfolding in the economy over time.”

That may not offer much clarity on when rate hikes will start. But the parameters for such a move are clear: The Fed wants to see more job growth and inflation moving closer to its 2% target.

European Central Bank

By Brian Blackstone

After unveiling a raft of measures in early June to stave off the threat of too-low inflation, the European Central Bank appears set for a lengthy summer pause. But its problems aren’t going away.

Annual euro-zone inflation, at 0.5% in June, may soften even more this summer to 0.3%, some analysts say, pushing it even further below the ECB’s target of just under 2%.

Lending to the private sector remains weak, and will likely remain so until banks get through ongoing health checks of their balance sheets. A new targeted ECB lending program won’t begin until September, suggesting these trends are unlikely to reverse anytime soon.

The ECB on June 5 reduced its key interest rates and installed a negative rate on bank deposits parked with it, which should encourage banks to lend to each other rather than leave surplus funds at the central bank.

The ECB also said it would offer banks cheap loans and four-year maturities, starting in September, on the condition that they extend more credit to the private sector. It will also speed-up preparations to purchase asset-backed securities, though that process will likely take many months given regulatory changes needed to make those assets more attractive.

Since June 5, ECB officials have fanned out across Europe pleading for patience from financial markets to let the new measures take effect before demanding new stimulus.

The ECB has reason to want more time. It’s in the middle of a major review of euro-zone bank balance sheets due to be completed in the fall, and is also conducting stress tests to see how banks would withstand economic shocks.

The hope is that once these reviews are completed, investors will gain confidence in the region’s banks and restore the flow of credit to the private sector.

Pressing the pause button also allows the ECB to wait while the Federal Reserve and Bank of England move closer to raising interest rates, which might cheapen the euro and provide a lift to euro-zone growth and inflation.

There’s a more practical consideration. With its traditional toolkit largely exhausted, the ECB’s next stimulus effort would likely have to include large-scale purchases of public and private debt, or quantitative easing.

QE is more complicated in the euro zone than in the U.S., U.K. and Japan where it has been used extensively. The euro bloc has 18 national bond markets, making it hard to target such stimulus where it is needed. And the policy is unpopular in Germany, where it stirs fears of a loss of central bank independence.

Pressure on the ECB to try QE may intensify this summer if inflation weakens. The International Monetary Fund said recently that the ECB should consider this step.

So ECB President Mario Draghi should enjoy his summer break; his in-box may be piled high in the fall.

Bank of Japan

By Tatsuo Ito

So far so good for Bank of Japan Gov. Haruhiko Kuroda, 14 months after firing his bazooka of easing measures. He appears to have successfully steered the economy past some challenges early in the year without changing policy course — though he faces more doubts and difficulties in the next few months.

Mr. Kuroda has shown skeptics he can lift inflation and sustain the economy, brushing aside market expectations that the central bank would take extra easing measures to cushion the effects of a sales tax increase in April.

Mr. Kuroda expects inflation to dip slightly over the summer as the economy contracts in the second quarter before returning to growth after that.

If inflation weakens more than the BOJ expects or flatlines at a lower rate, that will strengthen doubts about whether the bank’s giant bond-buying program can drive inflation up to its 2% target–reigniting wider expectations of additional action.

Mr. Kuroda continues to take an optimistic line. He has played down the danger presented by the higher sales tax, seen as the biggest challenge for the economic recovery engineered by Prime Minister Shinzo Abe and Mr. Kuroda.

Although it’s still early to perceive the full impact of the higher tax, it doesn’t appear to have badly damaged confidence among households and businesses. Sales figures also indicate that consumption may not be as badly hit as feared. Core consumer prices, meanwhile, rose 1.5% in April after factoring out the sales tax increase. That’s a little higher than the BOJ had forecast.

The governor’s bullish views have drastically reduced market hopes for imminent extra easing, with many economists now pushing out the timing of fresh action from July to October, when the bank releases another price outlook report. Some of them have stopped predicting additional action this year.

Mr. Kuroda sees inflation falling to around the 1.25% mark from a bit above it over the coming months before returning to a rising trend by the end of the year. While Mr. Kuroda has repeated a mantra that the economy is on track toward achieving 2% inflation in the fiscal year starting in March 2015, he has also said the BOJ won’t hesitate to take action if needed.

Should inflation fall below 1%, the consensus is he will readily reach for another round of ammunition.

Bank of England

By Jason Douglas

The Bank of England looks set to be the first among the world’s major central banks to call time on years of easy-money policies with a rate rise later this year.

The U.K. central bank has kept its benchmark rate pegged at a historic low since March 2009, but an economic growth spurt and tumbling unemployment are eating away at the economic slack that has kept a lid on inflation.

Gauging just how much slack there is and when to respond is the principal challenge facing the BOE’s rate-setting Monetary Policy Committee. Weak wage growth and subdued inflation suggest there’s plenty left; record employment and the fastest pace of growth in the Group of Seven industrialized economies suggest whatever slack is left will be eroded soon.

Officials have been at pains to stress that the timing of the first rate increase since a global financial crisis tipped the U.K. into recession in 2008 is less important than the shape of subsequent path of tightening. Officials say rates will rise slowly and are unlikely to rise above 2% or 3% for several years to come.

How to deliver on that strategy is increasingly becoming a source of angst on the nine-member MPC. Some officials want to get rate increases started earlier to reduce the risk that faster rises will be needed to contain inflation. Others fret that moving too soon will retard the recovery, particularly since thousands of British households may struggle to cope with higher borrowing costs without stronger income growth.

How these competing arguments play out will be critical to the timing of the first hike. The arrival of three new members to the committee this summer will make reading the monetary runes even harder.

The BOE faces another problem: a potential housing boom. But officials have said the central bank’s Financial Policy Committee, equipped with an array of “macroprudential” tools to dampen lending, will be the first line of defense against any worrying build-up in debt

People’s Bank of China

By Bob Davis

China’s central bank spent a lot of the second quarter fending off what it thought was a very bad idea: cutting interest rates across the board to boost economic growth. Such a move could further inflate China’s credit bubble and worsen its housing glut, the Peoples Bank of China argued in interagency sessions, according to Chinese officials. The PBOC carried the day and China has settled for a series of small monetary moves aimed at making more money available to small businesses and farms, which have a tough time getting bank loans.

But the central bank’s mantra of “Do No Harm,” will be tested a lot more in the third quarter.

Premier Li Keqiang declared, somewhat surprisingly, in early June that he expected – almost demanded – that China hit its declared growth target of 7.5%. With first-quarter growth at 7.4%, year-over-year, China has to rev up its growth engine somehow. And monetary policy is usually the first tool leaders think of, so expect a lot more infighting in the upper reaches of China’s government and Party, where the central bank is just one player among many. Unlike other central banks in big economies, the PBOC isn’t independent.

With the renewed focus on growth, the PBOC’s financial reform agenda may take a back seat in the third quarter unless the central bank can convince its superiors that liberalizing interest rates and opening up China to more investment can boost GDP growth. PBOC officials may have a shot at the latter; China’s leaders want to attract more money into the country and one way to do it is to let the currency appreciate and approve privately owned banks.

Reserve Bank of Australia

By James Glynn

Australia’s central bank has held its benchmark interest rate at a record-low 2.5% since August to help contain rising unemployment as a decade-long mining-investment boom cools.

The central bank is attempting to rebalance the economy away from its long dependence on mining.

But while low rates have helped drive house prices to record highs in major cities, they’ve had only a modest impact on sectors the central bank is trying to boost—including retail, manufacturing and domestic tourism.

Unemployment, at 5.8%, is close to historic highs, and the bank expects the level to remain elevated for much of the next two years. Meanwhile, consumer confidence took a big hit in May after the conservative government released its first budget, which included tax increases and steep spending cuts aimed at reducing the government’s budget deficit.

Still, some recent data have been more encouraging. Housing construction has begun to see some improvements thanks to low interest rates. Also, the economy grew by 3.5% in the first quarter from a year earlier, the strongest pace in two years.

The central bank remains cautious about the outlook, however, believing the mining-investment slowdown will gather momentum as major gas industry projects are completed.

Another concern is the rising Australian dollar. This year, it’s up by close to 8% against the U.S. dollar, partly as global investors flock to Australia’s relatively attractive bond yields. A strong currency hurts the manufacturing and tourism industries the most.

Central Bank of Brazil

By Paulo Trevisani

Brazil’s central bank left its benchmark Selic interest rate unchanged at 11% in May, marking the first policy meeting since April 2013 with no rate increase. The bank is battling high inflation amid low economic growth and ahead of a presidential campaign in which the economy is likely to take central stage.

The 12-month IPCA consumer-price index is at 6.4% and is forecast to pierce the official targeted range of 2.5% to 6.5%. The central bank says it hasn’t given up the mission of bringing inflation down to 4.5%. Some analysts said that the bank stopped raising rates too soon, but the policy makers seem to be now more worried about growth, which is forecast to slow to 1.2% this year from 2.3% in 2013.

The central-bank’s president, Alexandre Tombini, announced in June that it will extend the currency intervention program it started in 2013 to put a floor under the Brazilian real depreciation. The real is now more stable, mostly trading within a 2.20-to-2.30 per dollar range.

But managing the currency has become a tough balancing act, because a strong real could hurt exports and a weak real could feed inflation. The central bank’s next policy meeting is July 15-16. Analysts expect the Selic to remain unchanged at least until after the October election, when Mr. Tombini’s boss, President Dilma Rousseff, will seek a second term.

Bank of Canada

By Nirmala Menon

A recent uptick in Canadian consumer prices could pose a challenge for the country’s central bank, which has underscored concerns about low inflation as a reason to stand-pat on interest rates.

Since last October, the Bank of Canada has been in neutral, signaling it was as likely to cut rates as hike them. That marked a significant shift from its long-held stance of leaning more toward possible hikes. Many economists believe the change occurred not only because the central bank was worried about low inflation, but also because it wanted to weaken the Canadian dollar, which would help boost the country’s exports by making them cheaper in global markets.

Canadian policy makers want exports and business investment to drive the country’s growth, given that consumers are strapped with record-high debt levels after years of rock-bottom interest rates.

The Bank of Canada’s concern over low inflation isn’t unusual; other major central banks have also been fretting about slow price increases.  Canada’s annual inflation rate returned in April to the 2% desired by the central bank for the first time in two years, largely due to energy price increases. The central bank’s Gov. Stephen Poloz, however, has continued to highlight downside risks, saying that underlying inflation (which strips out eight volatile components) was probably around 1.2%, which “leaves us vulnerable to a downside shock of any kind.”

The shifting landscape on inflation poses a bit of a dilemma for Mr. Poloz. How can he ease up on low inflation warnings without leading some investors to bet on rate hikes coming sooner rather than later, which would drive up the Canadian dollar and perhaps dampen exports?

For now, weak growth and lackluster demand for exports give Mr. Poloz cover to continue flagging worry about low inflation. But if economic growth ramps up “it’s going to shorten the lifespan of that kind of rhetoric,” Desjardins Capital Markets economic strategist Jimmy Jean said.

Czech National Bank

By Leos Rousek

The Czech National Bank has set the second quarter of 2015 as the earliest possible date for ending its weak-koruna policy, as feeble consumer spending keeps the country’s annual rate of inflation just above zero and well below the bank’s 2% target.

The CNB is likely to leave its benchmark interest rate at near-zero levels for several months after winding down its policy of preventing the currency from strengthening against the euro. A too-strong currency can crimp exports and dampen inflation.

“We will formulate our policy on [rates] only after some time following the exit from the exchange-rate regime, so we’re talking about a time horizon well into the future,” central bank Governor Miroslav Singer said after the late June meeting of the bank’s policy board.

Analysts expect the bank’s headline interest rate to stay at its all-time low of 0.05% at least until early 2016, reflecting the recent pledge by the European Central Bank to maintain an extremely accommodative policy to stoke economic growth in the euro zone. About 80% of the Czech Republic’s trade is with companies in Western Europe.

“Recent policy moves by the ECB are complicating (the timing) of any future tightening measures (to be adopted) by the CNB,” said Prague-based analyst Jaromir Sindel of Citigroup.

Amid fears of deflation, the CNB last November began intervening in foreign exchange markets, and has since sold €7.4 billion ($10.1 billion) from its reserves to weaken the koruna more than 5% against the euro.

“Our currency commitment remains asymmetric in that we are allowing the koruna to move on the weaker side,” Mr. Singer said after the June policy meeting.

Denmark’s Nationalbanken

By Charles Duxbury

Denmark’s central bank will keep its eyes trained on the European Central Bank in Frankfurt for policy direction in the months ahead as it seeks to defend the Danish krone’s peg to the euro, which is the foundation of Danish monetary policy.

After the ECB cut rates in June, the Danish central bank chose not to follow suit, judging that the lower ECB deposit rate would weaken the euro against the krone after a period of euro strength.

The Danish central bank defends a EUR/DKK peg of 2.25% on either side of a level of DKK7.46038.

Nationalbanken’s passive approach seems to have paid off and the ECB rate cut has taken the euro down to DKK7.4549 from a May peak of DKK7.466.

Lars Peter Lilleore, an analyst at Danske Bank said it looks like the central bank has successfully let the ECB do the work.

“We expect no autonomous [Danish] action on the short horizon,” he said.

Nationalbanken’s deposit rate is 0.05% and its lending rate at 0.2%.

National Bank of Hungary

By Margit Feher

The European Central Bank’s recent stimulus measures and commitment to maintain easy-money policies far into the future have given the green light for the Hungarian central bank to keep cutting its main monetary policy rate to levels even lower than earlier expected.

Hungary has been cutting interest rates for nearly two years. Many economists expect the National Bank of Hungary to continue with reductions of 0.10 percentage point a month, possibly until the main rate hits 2%, from the current all-time low of 2.3%, down from 7% in August 2012 when its easing campaign began.

Headline inflation is at historic lows due largely to government-mandated household energy price cuts, the next of which, a 5.7% household power tariff cut, is due Sept. 1. Unused capacity and weak domestic demand have also dampened inflation.

Consumer prices fell 0.1% in May from a year earlier, the first decline since 1968, and are far from the country’s 3% medium-term inflation target. With the economy’s annual growth rate widely expected to reach 3% this year, inflation is seen likely to accelerate by year-end and meet the target sometime next year.

Hungarian central bankers will face the moment of truth when prices start to climb. Morgan Stanley economist Pasquale Diana said he has less confidence in his forecast of 3% for the main policy interest rate at end-2015 “as we simply have no record of how the current Monetary Policy Council will behave when the rate cycle turns.”

Reserve Bank of India

By Raymond Zhong

A new government took office in India in May, and for the Reserve Bank of India—which isn’t an independent central bank and operates in close consultation with the country’s finance ministry—the next few months will be defined as much by decisions out of New Delhi as by macroeconomic conditions.

The RBI held its policy interest rate steady at 8% after its most recent monetary-policy assessment, in early June. Consumer-price inflation edged down slightly in May, but an 8.3% annual rate is still high. The central bank’s aim is 8% by January and 6% a year thereafter. A drier-than-usual rainy season could crimp agricultural production, driving food prices up and causing RBI Gov. Raghuram Rajan to consider raising interest rates further, even amid uncertain GDP growth. Mr. Rajan said recently that “appropriate management” of the government’s massive reserves of wheat and rice will help keep price rises in check.

RBI policy over the next few months will depend on government action in more profound ways, too. Mr. Rajan has endorsed an internal committee’s recent recommendation to target consumer-price inflation as the single objective for monetary policy. Other current proposals for reforming the RBI include creating a formal monetary-policy committee that would vote on policy decisions, and potentially relieving the central bank of its responsibility for managing the government’s debt.

Any of these, if approved by Parliament, would revolutionize the way the RBI does business—and complicate the task for India’s new government as it works to revitalize the economy. A more-independent RBI with a mandate for price stability would leave the finance ministry without the ability to bias monetary policy toward lower interest rates to reduce government borrowing costs and pump up GDP growth.

Bank of Indonesia

By I Made Sentana

Clouds are gathering again over Indonesia’s economy, meaning monetary policy will likely stay tight for now.

Indonesia posted a surprise trade deficit of $2 billion in April, its second worst in five years, in part due to large fuel imports. The central bank is now predicting the current-account deficit will widen through the third quarter from $4.2 billion, or 2.1% of gross domestic product, in the first quarter.

The rupiah has fallen 3.5% since April, after gaining 6.7% in the first quarter.

There are some positives. Bank Indonesia managed to build up its foreign exchange reserves by $7.6 billion to $107 billion between January and May as foreign portfolio investors brought $11 billion into the country. Inflation eased to 7.32% in May from 8.38% in December.

Bank Indonesia officials for now plan to keep monetary policy tight to narrow the current-account deficit.

High interest rates are unlikely to be popular with Indonesia’s business community and consumers. Economic growth in the first quarter was 5.21% on year, its slowest pace in four years.

Many observers say the central government needs to cut costly fuel subsidies, which would slash the country’s fuel import bill. But these subsidies, which keep fuel costs for consumers below market prices, are politically sensitive. No change to the subsidies is likely before the presidential election July 9.

“For now, however, the burden fully falls on Bank Indonesia to keep the current account in check through tight monetary policy,” says OCBC’s economist Wellian Wiranto.

Bank Indonesia has said it will keep policy rates unchanged until the third quarter.

Bank of Israel

By Joshua Mitnick

The Bank of Israel faces a delicate task: boosting growth prospects and inflation without adding steam to an already frothy housing market.

It kept interest rates steady at 0.75% in the second quarter despite expectations by some in the market that Israel’s slowing economy would prompt the central bank to carry out a second rate cut this year.

“They basically decided to adopt a wait and see attitude,” said Jonathan Katz, chief economist at Leader Capital Markets, who said that initial first quarter growth estimates of 2.1% have been revised up to 2.7%  and that the picture is “not all doom and gloom.’’

Looking to the second half of the year, pressure for a rate cut will mount because inflation is expected to drop below the 1% lower bound of the central bank’s target, analysts say. That would have the side benefit of weakening the country’s robust currency, the shekel, which has undercut profits among Israel’s all-important export sector.

That said, the central bank is also concerned about Israel’s surging housing prices. Central bank Gov. Karnit Flug came out in recent months against a bill sponsored by Israel’s finance minister to eliminate a value-added tax for first-time buyers of new apartments, saying that such a move could boomerang by generating more demand in a market with limited supply.

Continued home-price increases may limit the scope for rate cuts. But some analysts believe the main problem underlying Israel’s hot property market is a lack of supply – not easy money.

“On balance, I think the probability is for a cut,” said Terrence Klingman, an economist at Psagot Investment House. “That would bring it to a historic low, but I don’t know how much more they can cut than that.”

Bank of Mexico

By Anthony Harrup

After surprising markets with a half percentage-point rate cut on June 6 to a record-low 3%, the Bank of Mexico is expected  to stay on hold for the rest of the year as inflation remains under control and economic growth picks up.

Since taking over the helm at the central bank in 2010, Gov. Agustín Carstens has made efforts to improve the bank’s communications with the market.

He introduced the publication of minutes from policy meetings, increased guidance, and personally presents all four of the bank’s quarterly inflation reports each year, taking questions from the media.

And yet, at least three of the bank’s four rate cuts under Mr. Carstens—there were three in 2013–have come with little or no warning.

The latest rate cuts “reaffirm a dovish central bank board that is willing to respond to downside risks to growth despite their sole mandate of price stability,” says Siobhan Morden, head of Latin America strategy at Jefferies. “The rate cuts were also a reminder that Latin America is not hostage to the [Federal Reserve], with less concern about the interest rate differential and the impact on capital flows.”

The Fed’s wind down of its bond-buying program and the prospect of higher yields in the U.S., were among the main reasons the Bank of Mexico was expected to hold rates, even in the face of sluggish growth in Mexico.

The central bank said the cut was most likely a one-time event, but its capacity for surprising markets will keep some from ruling out the possibility of more moves.

Probably, said Credit Suisse , the central bank took “an opportunity it simply couldn’t resist” so that when rates are eventually raised, the bank will be able to stop at a lower level.

Reserve Bank of New Zealand

By Rebecca Howard

New Zealand’s central bank raised interest rates in June for the third time in a row, and says more increases are coming. Its aggressive stance is at odds with central banks in other developed nations that still have rates at ultra-low, post-crisis levels.

The rationale is the agriculture-rich economy’s growing strength, fueled by rising Asian demand for dairy exports and a construction boom following a series of earthquakes that devastated its second-largest city, Christchurch.

Another driver for the rate hikes is an increase in number of immigrants in the country. The central bank is keen to head off inflationary pressures caused by newcomers purchasing homes and boosting spending in the economy.

Inflation is well within the central bank’s 1%-3% target band, but it’s expecting the pressure to grow. House-price inflation remains a concern, though new curbs on mortgage lending are helping contain it.

The latest rate increase brought the benchmark cash-rate target to 3.25%.  Though the rises were well flagged, markets were surprised by the central bank’s resolve to keep raising rates.

New Zealand’s economy looks in better shape than those in much of the developed world, where central banks are mostly still grappling with how and when to remove economic stimulus. Reserve Bank Gov. Graeme Wheeler has said the economy is moving forward with “considerable momentum.”

The strength of the New Zealand dollar remains a concern for the central bank, however, since it dents the competitiveness of the nation’s exports.

The kiwi dollar jumped more than 1.5% after the central bank last forecast more rate rises, underscoring the risks to the export-dependent economy of running too far ahead of the pack with rate increases.

Norges Bank

By Charles Duxbury

Norway’s central bank, Norges Bank, took a dovish turn at its last meeting in mid-June, making it clear to investors that it will cut its benchmark rate if needed in the months ahead.

“A further weakening of the outlook for the Norwegian economy may warrant a reduction in the key policy rate,” Gov. Oystein Olsen said June 19.

That message sunk the Norwegian krone against the euro as the prospect of rate rises before the end of next year looks less likely.

While Norway’s inflation rate is close to the central bank’s 2.5% target, the central bank is worried about the effect on the economy of lower borrowing costs abroad and falling oil industry investments at home.

The Scandinavian country is rich in oil and gas and its overall fiscal position remains enviable with no net debt and among the highest levels of economic output per capita in the world.

But a recent national statistics agency survey of the oil industry forecast that investments there would fall by around 20% next year as costs and uncertainty about government policy rise.

National Bank of Poland [check to see if it needs update after meeting Tues/Wed]

By Patryk Wasilewski

After several months of relative calm, the future path of Poland’s monetary policy became a bit of a mystery with contradictory signals from rate setters and questions about Gov. Marek Belka’s relationships with fellow policy makers.

After its June meeting, the 10-member rate panel surprisingly opened a door to potential rate cuts after a nearly year-long period of being adamant its next decision would be to raise borrowing costs.

The officials’ earlier confidence was weakened by signs that consumer prices over the summer months may be lower than in the same period last year, amid worrying signals the economy’s recovery may be faltering.

Decisions by the European Central Bank and Hungarian central bank to ease policies further have also contributed to the reassessment.

The annual rate of inflation slowed to 0.2% in May from 0.3% a month earlier, while industrial output rose at an annual rate of 4.4%, down from 5.4% in April.

Dovish rate setter Elzbieta Chojna-Duch recently said a cut in the benchmark interest rate, now at an all-time low of 2.5%, might be considered in July.

At the other end of the spectrum, hawkish member Andrzej Rzonca believes further easing would destabilize the economy and would require faster tightening later on.

The outlook is further muddied by a scandal about a leaked recordings of conversations involving Mr. Belka that have called into question the bank’s independence.

In the recordings–made by undisclosed people in July 2013–two senior officials are heard discussing a political deal under which the central bank would support the government with bond purchases in the event of any significant market turmoil. Mr. Belka can be heard telling Interior Minister Bartlomiej Sienkiewicz that the bond purchases would be conditional on a change of finance minister.

The central bank and the government have acknowledged the authenticity of the recording and the identities of the officials. Mr. Belka has denied attempting to influence the government’s personnel policy or promising any support for the governing party.

Bank of Russia

By Andrey Ostroukh

Stubbornly high inflation and a weak ruble make it unlikely that the Bank of Russia will ease monetary policy in the next few months, despite sluggish economic growth.

‪In early 2014, the central bank was expected to gradually cut rates throughout this year, boosting growth. But the Ukraine crisis was a game changer.

Western countries adopted sanctions against Moscow after its annexation of Ukraine’s Crimea region. In the first five months of the year, $80 billion in capital fled Russia, more than in the whole of 2013, although the outflow has faded since then. In early March, as the ruble hit all-time lows and pushed inflation higher, the central bank raised its benchmark interest rate. That was followed by another rate increase in late April.

The central bank left rates unchanged in June, but said it is committed to tightening policy further to reign in annual inflation, which hit  7.7% in June, up from just above 6% at the beginning of the year.

The Russian economy is now growing more slowly than at any time since President Vladimir Putin first came to power in 2000, except for during the 2009 global recession

Nonetheless, the central bank is sticking to its goal of adopting inflation targeting in 2015, which means it will let the ruble float freely.

South African Reserve Bank

By Patrick McGroarty

Interest-rate increases by South Africa’s central bank are a matter of when, not if.

And the “when” keeps getting pushed further into the future as a worsening economic outlook frustrates the bank’s plans to hike interest rates along with some of its emerging-market peers.

In January, The bank raised its key rate for the first time in six years to 5.5% during a bout of punishing capital flight from emerging markets. The unexpected move succeeded in drawing investors back. South Africa’s bonds and its currency, the rand, rallied.

Reserve Bank Governor Gill Marcus has pledged more rate increases to sustain investors’ interest and bring down stubbornly high inflation of around 6%. Many economists expect a hike of at least 25 basis points later this year.

“The interest rate increase in January was not a one-off move,” Ms. Marcus said in June. “However, the speed and extent of tightening will be sensitive to domestic growth considerations.”

Slowing growth has stalled her plans. Fitch Ratings recently predicted that the economy would grow just 1.7% this year, lower than the already abysmal 1.9% rate in 2013. On June 13 S&P cut South Africa’s foreign and rand-denominated debt ratings by one notch each, to BBB- and BBB+ respectively. Earlier that day, Fitch Ratings cut its outlook for the country to negative.

Ms. Marcus says there’s not much she can do to reverse these trends. In an unusually frank speech on June 10, she acknowledged that even at a time of unprecedented volatility globally, South Africans only had themselves to blame for their country’s dimming economic prospects.

“The domestic economy is facing enormous headwinds, many of which are of our own making,” she said.

Bank of Korea

By Kwanwoo Jun

In South Korea, many observers expect the central bank to delay raising its benchmark interest rate because of weaker domestic consumption following April’s ferry sinking.

The Bank of Korea has kept its key policy rate steady at 2.5% for 13 months through June. Many analysts had expected the bank to raise rates soon due to a strengthening economy, forecast to expand 4% this year, up from 3% in 2013, and inflation which is set to accelerate to 2.1% this year versus 1.3% in 2013.

But the ferry disaster, which left more than 300 people dead or missing, has traumatized the nation and led to a decline in consumer spending. That might mean the central bank remains on hold for longer than expected, some economists say.

Nomura economist Kwon Young-sun says the central bank will likely trim its growth forecast by 0.1 or 0.2 percentage points because the disaster suppressed consumer spending. “This could delay a rate hike, but we do not believe it would be enough to trigger a rate cut,” he said. Mr. Kwon forecasts a 0.25-percentage-point rate hike in December or early next year.

In a poll conducted by The Wall Street Journal, seven of 14 economists expect the BOK to increase the rate in the latter half of this year while five forecast a rate hike in the first half of next year.

Sweden’s Riksbank

By Charles Duxbury

Sweden’s central bank has long been fighting on two fronts against both low inflation and high and rising household debt.

But the battle against low inflation is now the Riksbank’s main focus with the consumer price index refusing to rise and criticism mounting about the bank’s inability to hit its 2% inflation target.

The world’s oldest central bank holds its next policy meeting July 2, with a statement on the meeting’s outcome due July 3. Many analysts expect Governor Stefan Ingves and his five colleagues on the executive board bank to cut the benchmark interest rate to 0.5% from 0.75%.

The bank last cut rates in December, and has been reluctant to do so since. It worries that Swedes, with a high average ratio of household debt to disposable income of 175%, will take lower borrowing costs as a signal to increase their debt burden further.

However, the lack of price pressure in Sweden looks set to force the bank’s hand in July.

Analysts are already speculating that a further cut could well be needed beyond that.

Swiss National Bank

By Neil MacLucas

Switzerland’s central bank has kept its monetary policy—including interest rates near zero and a cap on the franc-euro exchange rate—steady for almost three years, and that’s unlikely to change in the foreseeable future.

The Swiss National Bank left policy unchanged for a 12th-straight quarter on June 19, following the European Central Bank’s decision to impose negative interest rates on banks’ deposits with the ECB.

The SNB’s monetary policy is focused on defending its ceiling of CHF 1.20 per euro. Since the exchange rate has been steady at around 1.2180 since the ECB easing in June, analysts don’t expect the SNB to follow its European counterpart in charging banks to hold their funds.

“As long as the euro-franc holds steady around this level the SNB has no need to act, and so negative Swiss deposit rates aren’t needed at the moment,” said Lutz Karpowitz, a currency analyst at Commerzbank.

The SNB imposed the franc-euro ceiling in September 2011 to head off the threat of deflation and to help exporters’ compete in the euro area markets, which buy around 55% of all goods produced in Switzerland. A higher franc would make Swiss goods more expensive for euro-zone customers.

There had been speculation the euro could come under selling pressure versus the franc in the wake of the ECB easing, but the currency market is wary of testing the SNB’s resolve to defend the ceiling.

The SNB however does have concerns about the boom in the Swiss property market, which is being partly fueled by ultra-low mortgage rates. Since the SNB cannot raise rates for fear of boosting the franc, it will probably stick to its verbal warnings on the dangers of the housing market overheating.

Swiss mortgage banks should be in a position to properly assess the credit worthiness of their customers without the intervention of the SNB, according to analysts.

Central Bank of The Republic of Turkey

By Emre Peker

Turkey’s central bank is expected to cut interest rates further amid mounting political pressure and despite warnings that premature easing threatens to derail efforts to rebalance the $820 billion economy away from dependence on credit-fueled consumer spending.

Governor Erdem Basci surprised markets in June for a second time in as many months with a bigger-than-anticipated reduction to the central bank’s benchmark one-week repo rate, lowering it to 8.75% from 9.5%. Policymakers had in May unexpectedly cut the rate from 10%, just as annual inflation hit a two-year high of 9.66%. Price increases have peaked and will decline to 7.6% by yearend, according to the central bank, which has a more optimistic forecast than the 8.3% market consensus.

While policymakers in Ankara have reiterated their focus on slowing inflation toward the official 5% target, Mr. Basci said in mid-June that “measured” interest rate cuts of 0.25 to 0.75 percentage points remain on the table.

The central bank cited “recent improvement in global liquidity conditions” in delivering its latest rate cut, which followed dovish comments from the U.S. Federal Reserve, European Central Bank’s rate cuts and expected monetary stimulus, and China’s assurances that its economy doesn’t face a hard landing.

Turkey has been at the center of the ebbs and flows in emerging markets since the start of the year. In January the central bank raised rates aggressively to stem capital flight at the height of turmoil in emerging markets. When the crisis calmed, it was among the first to start reversing those hikes.

Regional tensions are another factor, with Islamist militants in neighboring Iraq—Turkey’s second-biggest export market–taking dozens of Turks hostage amid broader clashes. The lira has been one of the worst performing emerging market currencies since June 10, slumping by about 3% since jihadists captured Mosul and advanced toward Baghdad. A weakening currency could keep inflation higher than expected, adding to risks that the central bank will once again miss its forecast.

Mr. Basci has dismissed charges that the central bank is under pressure to juice growth before the August presidential vote and June 2015 general elections.

“We are also people of this nation, we don’t want high interest rates either,” Mr. Basci said, reiterating that cuts to borrowing costs would follow a slowdown in inflation.



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