A Diversity of Central Bank Rate Decisions… Dollar and Equities Mixed

November 18, 2021

Central bank officials today cut Turkey’s one-week repo rate by 100 basis points, left record-low policy interest rates unchanged in the Philippines and Indonesia, and are widely expected to announce an interest rate hike in South Africa.

This year’s unexpectedly sharp acceleration of inflation to multi-year and multi-decade highs around the world has overshadowed Covid and climate change on the front-burner of political, economic and social hot potato issues. Monetary policies are no longer moving in lock-step synchronization, which creates new opportunities for bigger exchange rate swings.

Overnight movements of the dollar range from gains of 2.5% against the Turkish lira, 0.5% versus the Mexican peso and 0.1% vis-a-vis the yen, yuan and sterling to losses of 0.5% versus the New Zealand dollar, 0.2% against the euro and Australian dollar, and 0.1% relative to the Swiss franc. The DXY weighted dollar index fell 0.15% and has settled back 0.6% from yesterday’s 16-month high.

Equity markets have also been mixed this Thursday, with Asian markets such as the 1.3% drop in Hong Kong following yesterday’s declining U.S. performance, European bourses showing mixed by minuscule net change, and U.S. futures pointing to a modest rebound at the open.

The price of WTI oil, which closed down 2-1/4% Wednesday, has moved 0.7% further below the $80 threshold. Gold is lower too.

While 10-year sovereign debt yields are down 3 basis points in the U.K., 2 bps in France, Italy and Spain and 1 basis point in Germany, the comparable Japanese and U.S. yields are respectively steady and a basis point higher.

Swiss industrial production fell 1.2% in the third quarter, reversing a rise of 1.2% in 2Q and halving the year-on-year increase to 8.3%. In October, Swiss exports and imports fell by 1.4% and 2.3%, and the trade surplus widened 1.9% to CHF 4.409 billion. That surplus also exceeded the average monthly surplus of CHF 4.0 billion during the first nine months of this year.

Swedish unemployment fell to a 19-month low of 7.6% last month and was 0.3 percentage points lower on a seasonally adjusted basis at 8.5% versus the August and September results. Dutch unemployment of 2.9% in October represented a 22-month low.

New car registrations last month in the European Union and the U.K. were respectively 30.3% and 24.6% lower than October 2020 levels. In each case, those declines represented the fourth on-year drops in a row.

Turkish monetary policy has become very politicized this year, conforming to the wishes of President Erdogan’s view that inflation conforms positively, not inversely, to changes in the central bank interest rates. Erdogan has secured his desired downtrend in Turkey’s one-week repo rate by replacing policymakers at the Central Bank of Turkey who disagreed with him. Today’s full percentage point cut to 15.0% followed reductions of two percentage points in October and one percentage point in September, and the new rate level is at its lowest in twelve months. Meantime, Turkish consumer price inflation has accelerated from 14.6% last December to 19.9% as of October, and PPI inflation over the same span shot up from 25.1% to a 232-month high of 46.3%. In a released statement, officials warn that “transitory effects of supply-side factors and other factors beyond monetary policy’s control on price increases will persist through the first half of 2022” but insists that restoring price stability remains the primary central bank goal and insists that with the policy rate at 15%, the stance is sufficiently restrictive. Moreover, there is a strong hint that another rate cut will be enacted in December. The trio of rate cuts totaling 400 basis points since September, to be sure, remains small relative to a string of hikes between September 2020 and March 2021 totaling 1075 basis points. But the reality is that the Turkish economy now finds itself in a vicious self-reinforcing cycle of currency depreciation and rising domestic inflation, and the perceived political meddling of monetary policy is also fueling the climb in inflationary expectations. The medium-term 5% inflation target lacks credibility, and the lira tumbled today to another record low of 10.9836 per dollar.

Bank Indonesia’s 7-day repo rate has been at 0.50% since a 25-basis point cut last February. On-year Indonesian inflation of 1.66% still lay below the central bank’s target, affording monetary officials to promote recovery from the Covid recession especially since the Delta Variant hit the country in a brutal way. A premature tightening of monetary policy could not only depress the recovery but also produce unwanted upward pressure on the rupiah.

Officials at Bangko Sentral ng Pilipinas cut the overnight repo rate five times last year by a total of two percentage points between February and November. The rate has been at a record low 2.0% for the past twelve months and is remaining at that level after today’s decision to maintain the rate at that level. Inflation is only modestly above the 2-4% target band, and officials concede that inflation risks next year lie to the upside of their baseline forecast. That said, the future evolution of Covid presents major uncertainties, and the inflation prognosis is considered “manageable.” Officials are prepared to respond to any second-round inflation emerging from the current supply-side price shocks emerge but also believe that “keeping a patient hand on the BSP’s policy levers, along with appropriate fiscal and health interventions, will keep the economic recovery more sustainable over the next few quarters.”

The South Africa Reserve Bank’s repo rate was increased by 25 basis points to 3.75% from a record low of 3.5% in place since April 2020. The approved decision passed by a narrow 3-2 vote by members of the Monetary Policy Committee. Analysts had been anticipating an initial rate hike this month. CPI inflation has surpassed the middle of the 3-6% target for the past half year and was at 5.0% as of October. Bank officials project only modest South African economic growth of 1.7% next year, 1.8% in 2023 and 2.0% in 2024, but inflation is liable to stay at or above the target midpoint (4.3% next year, 4.6% in 2023 and 4.5% in 2024). A released statement pledges to focus on second-round inflation effects, not the temporary shocks. That means a data-dependent future policy stance amid an environment that will remain highly uncertain due to Covid among other things. The baseline expectation regarding the repo path calls for hikes averaging 25 basis points per quarter over the coming three years, with the caveat that actual changes could easily deviate from this script. The repo rate at the start of 2020 before the pandemic was at 6.5%.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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