Central Bank Policy Uncertainties in Taming the Coronavirus – Readings of Latest Monetary Policy Decisions around the World
- Decision - Existing stance of monetary policy to remains appropriate – Bank Rate at 0.10% and total target of asset purchases at £895 billion (i.e., Government bond purchases at £875 billion and stock of sterling non-financial investment-grade corporate bond purchases at £20 billion)
o
CPI inflation has risen to 3.2% in August and
expected to be slightly above 4% in 2021 Q4 due to global energy prices and
cost pressures considered as transitory. The unemployment rate has fallen to
4.6% in the three months to July.
o
However, the pace of recovery of global activity
has showed signs of slowing and the UK GDP growth in 2021 Q3 has been revised
downwards by about 1% largely due to supply constraints on output. Therefore,
continuation of present accommodative monetary policy remains appropriate for
sustaining the growth of the economy.
22.09.2021 -
Norge’s Bank
- Decision - Raised the policy interest rate from zero to 0.50%, overnight lending rate from 1% to 1.25 % and reserve rate from -1.00% to 0.75 %.
- Background
- The economy has begun normalization with higher vaccination rate. Underlying inflation is low, but increased economic activity and rising wage growth will help push inflation up towards the inflation target of 2%. Therefore, there is no longer a need to maintain the current degree of monetary accommodation.
- However, the capacity constraints may result in faster-than-expected price and wage inflation and the build-up of financial imbalances (possibly build-up of asset/credit bubbles) needs to be countered with higher interest rates.
23.09.20211 - Central
Bank of Turkey
- Decision - Reduced the policy rate (one-week repo auction rate) from 19 percent to 18 percent.
- Background
o
Inflation has risen to 19.25% in August. Recent
increase in inflation has been driven by supply side factors such as rise in food
and import prices and supply constraints, increase in administered prices and
demand developments due to the reopening.
o
The decelerating impact of the recent monetary
tightening on credit and domestic demand is being observed. The tightness in
monetary stance has started to have a higher than envisaged contractionary
effect on commercial loans. Therefore, monetary policy relaxation is necessary
to reduce the cost-push inflation and to support the economic recovery.
- Few General Comments
o
Turkey is highly import-dependent economy funded
by short-term foreign capital mobilized routinely at high interest rates
supported by the high policy rates based monetary policy. Therefore, the
exchange rate is highly volatile on capital flows and monetary policy. However,
the view of the Executive President of Turkey is the need for interest rates to
be kept at low to reduce cost and inflation and build the business confidence
through strong economic activity supported by low interest rates regime.
However, the Central Bank working with the foreign investors is inclined to
keep interest rates high to maintain the import-dependent economy. The conflict
between the President and the Central Bank has resulted in removal of the
Governor in two instances so far since 2018.
o The country has been confronting a severe foreign currency crisis since early 2018 and the exchange rate for the US dollar has so far depreciated by about 234% (from 3.8 in January 2018 to 8.9 at present) resulting a high level of inflation. Therefore, the policy rate was raised during the year of 2018 from 8% to 24%. However, the stiff resistance of the President with the removal of the Central Bank Governor led the Central Bank to cut policy rates steadily back to 8.25% until April 2020. However, this policy direction was not sustainable due to aggravated foreign currency situation that led the Central Bank to raise the policy interest rates back to 19% during the period from September 2020 and March 2021 (steeper increase by 10.75%). The antagonized President again removed the Central Bank Governor immediately after raising the interest rate to 19% on 19 March 2021.
o
Immediately after the policy rates cut, the
exchange rate depreciated by 1.1% pushing inflation rate to 19.58%.
29.09.2021 – Bank
of Thailand
- Background
- Although uncertainties surrounding the economic outlook remained high, the progress on vaccination and earlier-than-expected relaxation of the containment measures would help support the economy in the period ahead.
- Monetary policy must contribute to continued accommodative financial conditions overall. Financial and credit measures should be expedited to distribute liquidity to the affected groups in a targeted manner and help reduce debt burden. These measures include the special loan facility, asset warehousing scheme and other measures by specialized financial institutions (SFIs). In addition, financial institutions should accelerate debt restructuring to have broader impacts and be consistent with borrowers’ long-term debt serviceability.
05.10.2021 - Reserve Bank of Australia
(RBA)
- Decision - Maintaining the policy stance unchanged
- The cash rate target at 10 basis points and the interest rate on Exchange Settlement balances at zero per cent.
- The target of 10 basis points for the April 2024 Australian Government bonds.
- Continue to purchase government securities at the rate of $4 billion a week until at least mid-February 2022.
- Wage and price pressures remain subdued. The Delta outbreak has interrupted the recovery of the economy and, therefore, the GDP is expected to have declined materially in the September quarter. This setback is expected to be only temporary. As vaccination rates increase further and restrictions are eased, the economy is expected to bounce back.
- The RBA is committed to maintaining highly supportive monetary conditions to achieve a return to full employment and inflation consistent with the target. Therefore, the RBA will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This condition is not expected to be met before 2024.
- Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.
06.10.2021 -
Reserve Bank of New Zealand (RBNZ)
- Decision - Increased the Official Cash Rate (OCR) by 0.25 percent (that has remained since 16 March 2020 by cutting from 1.00 percent) to 0.50 percent in order to continue reducing the level of monetary stimulus so as to maintain low inflation and support maximum sustainable employment.
- Background
- The level of global economic activity has continued to recover, supported by accommodative monetary and fiscal settings, and rising vaccination rates enabling a relaxation of mobility restrictions. Timely Government support for business and jobs is effective at cushioning the near-term impact of COVID-19 on economic activity. However, considerable uncertainty exists regarding the longer-run economic impacts of COVID-19.
- CPI inflation is expected to increase above 4 percent (3.3% at present) in the near term before returning towards the 2 percent (target) midpoint over the medium term. The near-term rise in inflation is accentuated by higher oil prices, rising transport costs and the impact of supply shortfalls, leading to more generalised price rises.
- Global inflation has increased due to ongoing supply bottlenecks, resulting in higher costs. These supply disruptions and labour shortages are affecting productive capacity. At the same time demand is recovering causing pressure on prices. Global inflation has also been pushed higher in the near-term by rising energy prices. In part this reflects transition costs associated with climate change. In response to signs that inflation pressures are becoming more persistent, some central banks have started the process of reducing monetary policy stimulus.
- Further removal of monetary policy stimulus is
expected over time, with future moves contingent on the medium-term
outlook for inflation and employment.
General Comments
- Statements relating to above policy decisions show that central banks (similar to others) are not sure of their impact on the overall activity of the economy. They generally refer to the near-term global and country trend of CPI inflation, GDP growth and employment in the recovery from COVID -19. They also refer to supply constraints, capacity pressures, labour shortages, energy price rises and underlying inflationary pressures that are considered either as transitory or medium-term. However, they have no mechanism to assess the economic impact of their policy stance and tend to urge cooperation of fiscal policy measures to stabilize economies. Further, instabilities created by ad-hoc policy reversals or changes are ample in the policy literature.
- However, they never attempt to revisit the prevailing/conventional monetary policy models to streamline credit/monetary flows for cleaning up the pressures and constraints that hinder the economy activity. Meantime, their bureaucratic restrictions and regulations on bank and shadow bank credit under hypotheses of micro prudence and macro prudence immensely disturb credit function in the economies. Therefore, it is recommended that central banks search for a surgical approach to the credit distribution function under the monetary policy so as to fasten the recovery from and to resolve long-term impacts of the Coronavirus.
P.
Samarasiri
Former
Deputy Governor, Central Bank of Sri Lanka
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