Several Central Banks Left Rates Steady, But Fresh Price Data Fan Concern

February 10, 2022

The Reserve Bank of India‘s repo and reverse repo rates were left unchanged at 4.0% and 3.35%. A released statement explains, “The MPC notes that inflation is likely to moderate in H1:2022-23 and move closer to the target rate thereafter, providing room to remain accommodative” And adds “the ongoing domestic recovery is still incomplete and needs continued policy support.” The key repo rate has been at 4% since cuts of 75 basis points in March 2020 and 40 bps two months later. Consumer prices recorded their first monthly dip in 11 months in December, but their 12-month rate of increase accelerated 0.7 percentage points to 5.6%.

In Indonesia where CPI inflation is comparatively low at 2.18% but nonetheless its highest in 20 months, officials at Bank Indonesia retained a record low 7-day reverse repo rate of 3.5%, the level since a 25-basis point cut in February 2021 capped of 125 post-pandemic basis points of easing during 2020. A released statement today asserts that “Rupiah exchange rate movements remain under control despite elevated global financial market uncertainty” and “Inflation is low and contributing to economic stability.

Officials at the National Bank of Serbia also kept their policy interest rate at its record low, 1.0%, where such has been since December 2020 after 125 basis points of reduction that year. However, a released statement explains that other tools have been used to tighten monetary conditions a bit, namely a rise since October in the weighted repurchase price to 0.75% from 0.11%. Officials note that “after temporarily calming down by the end of last year, crude oil prices have turned upward again since January, mostly due to the geopolitical tensions and increased energy demand, with prices of other primary commodities following suit.” Should inflation push “above the upper bound of the target tolerance band, the NBS stands ready to respond by all the available instruments.”

Prior to late 2018, the Swedish Riksbank‘s repo rate had been as low as negative 0.50%, and it has been at zero percent since the end of 2019. Decisions were made at today’s policy review to keep that rate level probably until the second half of 2024, which would be a little bit sooner than indicated previously, and to replenish maturing bond holdings this year that were acquired during the pandemic. This second decision drew three dissenting votes on the Executive Board. Moreover, officials expressed more flexibility than before in their forward guidance:

Monetary policy needs to be constantly adapted to changes in the economic outlook and inflation prospects. The Riksbank stands prepared to adjust expansiveness in either direction. The Executive Board may cut the repo rate or, in some other way, make monetary policy more expansionary if inflation prospects weaken. This applies in particular if confidence in the inflation target were to be under threat. On the other hand, if inflation were expected to exceed the target in a substantial and lasting manner, a less expansionary monetary policy would be justified. One adjustment to reduce
expansiveness could take place via repo rate rises and/or the reduction of asset holdings.

Price data released around the world today are worrisome.  US. consumer prices in January were most highly anticipated report and a crusher at that. Once again, inflation surpassed analysts expectations. A 7.5% rate of total CPI inflation was the most since February 1982, 0.2 percentage points higher than in the prior month and up from 1.4% in January 2021. Core inflation accelerated by half a percentage point to 6.0%, highest since August 1982. Twelve-month increases in energy, food, and the non-energy service sector consumer prices printed at 27.0%, 7.0%, and 4.1% in the latest reported month.

Japanese domestic producer prices, which had recorded no monthly change in December, rose 0.6% in January and were 8.6% higher than a year earlier. Import price inflation eased from 42.5% in December to 37.5%.

Dutch consumer price inflation of 6.4% in January was up from 5.7% in December and 1.4% in January 2021. 6.4% is the highest on-year advance in 478 months, but a silver lining is that core CPI remained steady at 2.4%.

Danish CPI inflation catapulted 1.2 percentage points to 4.3% in January, most in 161 months.

Norwegian CPI inflation eased back to a 6-month low of 3.2% last month. Norwegian producer prices fell 1.2% on month and decelerated to a 12-month increase of 58.2%, its smallest rise in four months.

Portuguese CPI inflation jumped 0.6 percentage points to a 119-month high of 3.3% in January, and core CPI inflation in that economy increased from December’s 1.8% pace to 2.4%.

A while prior to the release of U.S. consumer price data for January, the major U.S. equity barometers were pointing to a flat open, but within less than the first 15 minutes of trading, the S&P, DOW, and Nasdaq had slumped by 0.8, 0.4, and 1.2%, respectively. Overnight trading saw Japan’s Nikkei and Hong Kong’s Hang Seng indices close 0.4% higher. The German Dax and Paris Cac now show drops of 0.4% and 1.0% versus slight upticks earlier in their trading day.

The 10-year U.S. Treasury yield had jumped seven basis points since the start of this update and shows a net rise of five bps from Wednesday’s close. European 10-year sovereign debt yields have been pulled sharply higher in the Treasury market’s wake and currently show daily climbs of 12 basis points in Italy, 8 bps in Spain, 6 bps in France, 5 bps in Great Britain, and 4 bps in Germany.

Bad inflation news also helps the dollar, which had been flat on the weighted DXY index prior to the CPI release but now shows a daily advance of 0.3%.

The price of a Bitcoin has fallen 1.2% so far today, while WTI oil and gold shows a 1.0% rise and a 0.2% dip.

The Japanese yen was particularly vulnerable when higher-than-expected U.S. CPI data were released because a Bank of Japan policy board member was quoted overnight making dovish comments defending that bank’s persistent maintenance of very low interest rates. Against the yen, the dollar is currently trading at 116.12 yen, just marginally off its more than one-year high set earlier in the session and 11% stronger than its 52-week low.

Among other data highlights today, new bank lending in China last month swelled to a record high of CNY 3.98 trillion, and on-year growth in M2 money accelerated 0.8 percentage points to 9.8%.

New jobless insurance claims in the United States last week slipped to a 5-week low of 223k.

Industrial production between December 2020 and December 2021 rose 12.5% in Belgium, 3.9% in Austria, and 8.1% in Greece but fell 0.1% in South Africa.

Turkish unemployment of 11.2% in December was down from 12.7% a year earlier.

Saudi Arabian GDP growth slowed sharply between 3Q 2021 and last quarter, but year-on-year growth of 6.8% was almost as high as 7.0% in the prior quarter.

On the U.S. Covid front, yesterday’s single day death count of 3,570 was ironically juxtaposed against a slew of state governors relaxing mask mandates for businesses amid an intensifying political backlash against such requirements.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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