Central Bank Interest Rate Scorecard

April 16, 2020

The year 2020 is less than a third completed and already proving to be a very active one from a monetary policy standpoint. Mandated restraints on social gathering have depressed global GDP growth with a ferocity unknown in living memory. Regrettably, the scope for reducing nominal interest rates was limited from the start for many countries. In the wake of the Great Recession, wage and price inflation remained unexpectedly low, and economies often struggled to tolerate efforts to “normalize” interest rates even if for the simple goal of securing rate levels sufficiently above zero percent before the next recession’s onset. That moment has now come.

Fortunately, the economic upswing was sustained for slightly more than a decade, and last year ended with scant indication that 2020 might not be yet another year of positive economic growth in most countries. A monetary policy lesson learned during the financial crisis of 2007 and ensuing recession is that it is better to hit a potentially huge economic shock with commensurate force in the earliest stages than to proceed incrementally as the flow of negative data confirms an ongoing and intensifying downturn.

No fewer than 62 central banks have changed policy interest rates this year, almost entirely in a downward direction. In Argentina, a rare case where hyperinflation of around 50% continues, the central bank has cut the policy interest rate three times by a total of eight percentage points to 42%. That the biggest central bank rate drop this year, followed by a 300-basis point reduction in Egypt in a single move in mid-March and two move in Ukraine totaling 250 basis points done in late January and mid-March.

Central banks in Turkey, South Africa, Pakistan and Moldovia have each implemented a total 225 basis points of reduction in policy interest rates, and the Federal Reserve and Bank of Canada are in the next highest tier with Ghana and Trinidad & Tobago that have cut policy rates by 150 basis points in 20w0. A total 125 basis points of interest rate reduction was done at six other central banks including the Bank of Norway and Bangko Sentral ng Pilipinas (whose rate was reduced today by 50 basis points). Monetary authorities in Hong Kong and Macao have lowered rates from 2.0% at the start of this year to 0.86% now, and a group of nine central banks including Iceland and Poland have lowered their rates by a total of one full percentage point. The Czech National Bank is also a member of this group in a net sense because its first change of the year was a 25-basis point hike to 2.25% on February 6th. This was followed by cuts of 50 basis points in mid-March and another 75 bps ten days later.

There have been central bank interest rate reductions totaling 75 basis points so far this year in seven countries, including New Zealand, India, Brazil and Mexico. The British Base Rate of 0.1% is now 65 basis point below its end-2020 level. Eleven other central banks including those in Indonesia, Australia, South Korea and Thailand have cut rates by 50 basis points since the start of this year. Taiwan, Russia and Saudi Arabia are among the nine central banks with just one 25-basis point rate cut in 2020. Central bank rates in Israel and China have fallen by even less than that basis increment, and those in Kyrgyzstan, Tajikistan, and Kazakhstan are higher than their end-2020 levels by 75, 50 and 25 basis points, respectively.

Monetary policy changes this year are not limited to the aforementioned banks. In Singapore, for instance, monetary policy is subordinated to a exchange rate target range, defined by a midpoint, width, and corridor slope, and that policy is reviewed semi-annually in April and October. Officials there recently reduced the slope of the Singapore dollar’s trading range to zero percent,which is an easing move and tantamount to resistance against any appreciation.

With interest rates now at or very near tolerably effective lower limits, central banks moreover are resorting increasingly to unconventional tools of stimulus such as asset purchases and schemes to inject liquidity and encourage bank lending. Many of these programs are ones developed during the Great Recession, and other have been initiated this year. Currency intervention has become more prevalent, too. Notable central banks that haven’t cut interest rates but that are shouldering part of the effort to counter Covid-19’s drag are the Bank of Japan, Swiss National Bank and European Central Bank. The fact that the Federal funds rate is now 150 basis points lower than at end December, while the policy rate at this trio of central banks has not moved has not prevented the dollar from appreciating broadly in 2020. On the contrary, dollar strength is one extra consideration that Fed officials must keep in mind in order to keep monetary policy appropriately stimulative. If the Fed fails to augment the current stimulus and the dollar continues to appreciate, U.S. monetary conditions will tighten, and U.S. inflation would be more apt to drift into deflation’s gravitational field.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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