Monetary Policy Week in Review - 30 July 2011

The week in monetary policy saw 8 central banks announcing interest rate decisions. Of those that changed rates were: India +50bps to 8.00%, Nigeria +75bps to 8.75%, and Colombia +25bps to 4.50%. Meanwhile those that held monetary policy interest rates unchanged were: Israel 3.25%, Hungary 6.00%, New Zealand 2.50%, Kenya 6.25%, and the Philippines 4.50%. Other than interest rates, the Philippines raised its required reserve ratio by 100 basis points to 21%, and Turkey dropped its required reserve ratios by 100-200bps to add extra liquidity to the market.

In terms of themes, the week was very much dominated by emerging market central bank activity. India surprised the market by raising rates more than expected in response to a persistent inflation threat against the backdrop of still relatively strong economic growth. Indeed the message was that emerging markets are still facing elevated price levels and inflationary impulse, and many of them are still recording relatively high rates of growth, particularly as compared to developed markets.

A selection of key quotes from the monetary policy statements and media releases are listed below:

• Bank of Israel (held rate at 3.25%): "Forecasters' inflation expectations for the next twelve months remained steady at slightly below the upper limit of the target range. Forecasters' inflation expectations and those derived from the capital market go together with the assessment that the Bank of Israel will continue to increase the interest rate, but at a slower pace than in the first half of the year."
• Reserve Bank of India (increased 50bps to 8.00%): "Considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance,".
• Central Bank of Nigeria (increased 75bps to 8.75%): "The inflation outlook appears uncertain owing to the expected implementation of the new national minimum wage policy and the imminent deregulation of petroleum products," and that there is "the need for pursuing policies to foster macro- economic stability, economic diversification as well as encouraging foreign capital inflows".
• Reserve Bank of New Zealand (held rate at 2.50%): "Provided current global financial risks recede and the economy continues to recover, the Bank sees little need for the March 2011 'insurance' cut to remain in place much longer. The current very high value of the New Zealand dollar is acting as a drag on the New Zealand economy. If this persists, it is likely to reduce the need for further OCR increases in the short term."
• Philippine Central Bank (held rate at 4.50%): "bank lending has been growing at double-digit rates since January 2011, supported by the strong momentum of domestic economic activity and stable financial conditions... The Monetary Board is of the view that sustained foreign exchange inflows, driven by upbeat market sentiment over the brighter prospects for the Philippine economy, could fuel a further acceleration of domestic liquidity growth which could pose risks to future inflation."
• Central Bank of Colombia (raised rate 25bps to 4.50%): "Since March, the average measures of core inflation has been a slight upward trend in June and reached a level close to the midpoint of the target range (3% + / - 1 percentage point). Inflation expectations at various horizons are also within that range."

Looking to the central bank calendar, next week is set to be dominated by developed market or advanced economy central bank activity (note, the US also meets early in the following week). So it will be an interesting week in terms of how these banks react to whatever happens with the US debt situation...

• AUD - Australia (Reserve Bank of Australia) - expected to hold at 4.75% on the 2nd of August
• GBP - UK (Bank of England) - expected to hold at 0.50% on the 4th of August
• CZK - Czech Republic (Czech National Bank) - expected to hold at 0.75% on the 4th of August
• EUR - Eurozone (European Central Bank) - expected to hold at 1.50% on the 4th of August
• JPY - Japan (Bank of Japan) - expected to hold at 0.10% on the 5th of August

Source: www.CentralBankNews.info

Article source: http://www.centralbanknews.info/2011/07/monetary-policy-week-in-review-30-july.html

New Zealand Markets - Worth a Look?

Here's an update on the New Zealand markets. First up is a look at the currency, the NZD (also known as the "Kiwi") took a bit of a dive in the past week or so on the back of a few things; first there was the Ireland and wider sovereign worries in the EU, this took some of the risk off - and since the NZD is considered a risk currency i.e. correlated with equities, the NZD has also taken a bit of a fall. Which is unsurprising, as the NZD is more or less at the mercy of what the USD is doing in this pair. The other big thing that happened to knock it down a bit was the Standard and Poor's announcement putting New Zealand's sovereign rating on negative outlook (rated AA).


The question is, will these events be the catalyst that starts the Kiwi into free fall? Make no mistake about it, the NZD is well overpriced against the USD at the moment when you considered the fundamentals. It is well beyond the PPP rate, and is still at the high end of it's historical trading range, and quite a distance from the mean. So it wouldn't be surprising if the NZD did fall further, but of course, the USD could stop that if there were further weakness in the dollar. And of course as one of the carry trade currencies, monetary policy will also play a role.


And what of New Zealand equities? The valuations are still relatively attractive, and it's a good market to generate dividend income, with many high yielders on the NZX. On NZ equities, if you can't gain access to the New Zealand stock market directly there is the recently launched ETF; ENZL which so far is up about 10% since inception, and has clocked up about $55 in net assets. But one of the biggest attractions about the New Zealand market is its low rate of broker research coverage. This means the benefits to be garnered from doing additional research are much higher than e.g. the US, which means opportunities for relatively easy alpha capture. But on the economic outlook front, the prospects are probably similar to the US; the recovery is underway, but growth will almost certainly be sub-trend for a period. Macro aside, it's worth a look.

Sources
Econ Grapher Analytics www.econgrapher.com
Yahoo Finance finance.yahoo.com
Global View Forex www.global-view.com

Article Source: http://www.econgrapher.com/27nov-nzmarkets.html