CENTRAL BANKER REPORT CARDS 2014

• Introduction - Trouble With Bubbles by Gordon Platt

• 2014 Central Banker Report Cards | The Americas

• 2014 Central Banker Report Cards | Europe

• 2014 Central Banker Report Cards | Asia

• 2014 Central Banker Report Cards | Middle East & Africa

• Central Banker Summaries | The Americas

• Central Banker Summaries | Europe

• Central Banker Summaries | Middle East & Africa

2014 Central Banker Summaries | Europe

The Reserve Bank of Australia says it is comfortable in keeping its policy rate at a 50-year low of 2.5% for an extended period. Governor Stevens says there is “still quite some way to go” before nonmining activity fully picks up the slack from a slowdown in the mining sector. He has continued to talk the exchange rate down, saying that the Australian dollar is high by historical standards and that there could be a significant fall in the currency at some point. While monetary policy remains accommodative, rates could rise modestly next year if the economy improves.

Azerbaijan’s central bank cut its refinancing rate by a half point to 4.25% at the end of April, as economic growth slowed sharply from last year’s 5.8% and inflation remained below target. The country is highly dependent on oil and gas exports. Limited increases in oil production could restrict future growth. Over the longer term, the central bank plans to reduce direct lending to public entities and to make the exchange rate more flexible. It also needs to improve regulation of the country’s underdeveloped banking sector.

Bangladesh Bank failed to meet its private-sector credit growth target in the latest fiscal year, as political unrest dampened investment. The bank also declined to lower interest rates, as it sought to contain inflation, which is around 7%. Following last year’s collapse of the Rana Plaza building outside Dhaka, which killed 1,130 garment workers, failure to meet global safety standards is threatening the industry, the main source of export earnings. Meanwhile, remittances from overseas workers fell, after Arab oil-exporting countries in the Middle East blocked the entry of more Bangladeshi workers.

China’s monetary policy remains an enigma. The People’s Bank of China lowered the rate on 14-day repos by 10 basis points to 3.7% at the end of July, at the same time that it drained liquidity. Meanwhile, central bank officials are forecasting a strong lending surge to prop up the real estate market. Policy seems to be easing to support economic growth, with the money supply likely to come in above target this year. Governor Zhou is seeking ways to stabilize interest rates, following big swings in recent years. The central bank could adopt an interest rate corridor to provide more certainty. It said in a recent report that such a system could “effectively guide and adjust market rates.”

The Hong Kong Monetary Authority, the de facto central bank, stepped into the foreign exchange market in July for the first time in 18 months to prevent the Hong Kong dollar from rising above its narrow trading channel of HK$7.75 to HK$7.85 to the US dollar. China’s tight credit policies have increased the demand for loans in Hong Kong. An increase in mergers and acquisitions added to demand for the Hong Kong currency. The Hong Kong Monetary Authority says it will maintain the stability of the currency in accordance with currency-board arrangements.

So far, Governor Rajan has lived up to his stellar advance billing. The Indian economy is rebounding, and the rupee’s volatility has declined to a three-year low. Rajan is working with prime minister Narendra Modi to devise a system of inflation targeting that could help to curb rising consumer prices. Meanwhile, Rajan is speaking out on the need for more coordination in monetary policy by central bankers around the world, as the effects of their unconventional policies spill across borders. The current “nonsystem” in international monetary policy is a source of substantial risk, he says.

Bank Indonesia has kept its policy rate unchanged at 7.5% so far this year, but it has a tightening bias in light of the fact that inflation is above target. By keeping its policy tight, the central bank expects domestic demand to ease, reducing the need for imported oil. Rising manufactured exports should contribute to real GDP growth of 5.1% to 5.5% this year, the bank forecasts. Joko Widodo, a former furniture exporter and governor of Jakarta, who won July’s presidential election, is likely to adopt market-friendly policies, analysts say.

The Bank of Japan is making progress in its goal of defeating deflation, although additional easing may be required. The bank expects real GDP growth of only 1% this year, assuming an extension of the current stimulus plan. Inflation for both fiscal years 2015 and 2016 is forecast to be roughly in line with the bank’s 2% target. The April sales tax rise depressed consumer demand, although the bank expects its negative effect to gradually diminish. The tax increase was designed to help bring Japan’s massive debt under control.

Kazakhstan’s central bank devalued the tenge by 19% in February, instead of raising interest rates or depleting reserves to support the currency. The result was a rise in reported inflation to 7% in June from 4.5% in February. Meanwhile, economic growth has slowed to less than 4% from 6% in 2013. The oil-rich country imports most consumer goods. Kelimbetov, a former deputy prime minister, was named central bank governor last October, replacing Grigory Marchenko. At the end of May, Kazakhstan joined the Eurasian Economic Union with Russia and Belarus.

Bank Negara Malaysia raised its policy rate by a quarter point at its July meeting to 3.25%, its first increase since May 2011. The economy remains strong, and exports are expected to benefit from the recovery in the advanced economies, the bank says. Inflation has been running above its long-term average, and Bank Negara raised its policy rate to anchor inflation expectations. Zeti, who has been governor of the central bank since 2000, warned earlier this year that inflation could pick up in 2015, with a new 6% goods-and-services tax scheduled to come into effect next April.

The RBNZ raised interest rates repeatedly this year, as inflation pressures picked up amid a property boom. The bank was one of the first to use an official inflation target to guide monetary policy decisions, beginning in 1990. In March of this year, the bank began raising rates from a record low 2.5%, becoming the first central bank among the developed countries to increase rates in the current cycle. The rising rates have boosted the New Zealand dollar, which could limit the bank’s appetite for further tightening.

Wathra was confirmed in April as Pakistan’s third central bank governor in four years. He had served as acting governor since January. The State Bank of Pakistan has kept the discount rate unchanged at 10%. Rising foreign reserves have halted a decline in the rupee. The economy is expanding at a moderate rate of just above 4%, while core inflation has remained steady at about 8%. Pakistan is reforming its economy and trimming its budget deficit to meet conditions of an IMF loan.

The Philippine central bank raised its official rate a quarter point in July to 3.75%, in a preemptive response to signs of inflation pressure. Earlier this year it raised the rate on special deposit accounts and increased the reserve requirement ratio from 18% to 20%. Inflation remains within the bank’s 3% to 5% target range, but the target will be lowered to 2% to 4% in 2015. Meanwhile, the economy continues to grow at about a 6% annual rate, and inflows of remittances are steady, contributing to a rise in foreign exchange reserves. The country’s elevation to investment-grade status reflects its strong macroeconomic fundamentals and its favorable economic prospects going forward, Governor Tetangco says.

Singapore’s monetary policy is focused on managing the exchange rate to keep inflation under control. The Monetary Authority of Singapore says it will maintain its policy of allowing a “modest and gradual” appreciation of the Singapore dollar, despite a slowdown in the economy. The MAS says wage pressures will persist, with tight conditions in the labor market, as the government seeks to reduce its reliance on foreign workers. China is the main destination for Singapore’s exports, followed by Europe and the US.

Lee has maintained an accommodative monetary policy since succeeding Kim Choong-soo, whose four-year term ended in March. The Bank of Korea delivered a quarter-point cut in its policy rate in August, citing the lack of significant recovery in domestic demand following the Sewol ferry disaster in April. Lee is not likely, however, to make any major changes in policy. Inflation remains below target.

With low inflation and GDP growth of more than 7%, the Sri Lankan economy is performing well. Five years after the end of its 26-year civil war, Sri Lanka’s tourism industry is booming and hotel construction is rising sharply. The trade deficit has narrowed, and remittances from overseas workers are rising. The central bank cut its lending rate by a half point to 8% in January, despite the IMF’s suggestion that it wait for earlier reductions to take effect. The public debt, which stands at about 78% of GDP, is a risk factor if borrowing costs rise.

Taiwan’s central bank has kept interest rates on hold, despite a small rise in inflation, which remains below the bank’s 2% target. Governor Perng says the economy is still operating below its potential and needs an accommodative monetary policy. At the same time, Perng, as governor of the central bank has taken steps to cool the booming property market by tightening mortgage lending. The economy is benefiting from a sharp rise in Chinese visitors and rapid growth in the offshore renminbi market. Exports remain concentrated in semiconductors, although machinery and metals exports are growing.

The Bank of Thailand cut its official repurchase rate by a quarter point in March to 2%, a three-year low, as the economy contracted amid political turmoil and lower prices for sugar and rubber exports. The Thai baht depreciated and bond yields rose briefly, following a military coup in May. The junta resumed subsidy payments to rice farmers, cut diesel prices and increased spending to boost economic growth. The central bank expects real GDP to rise 1.5% this year and to accelerate to 5.5% growth in 2015, if an expected recovery in tourism materializes.

Uzbekistan’s monetary policy remains accommodative, despite double-digit inflation. The central bank, which lacks independence, lowered its refinancing rate to 10% from 12% in January. The authoritarian regime of president Islam Karimov has created a poor climate for foreign direct investment. Following its latest visit last year, the IMF said the authorities should tighten monetary policy and increase exchange-rate flexibility. Remittances from overseas workers are keeping the economy afloat. The country’s main exports are natural gas, gold and cotton, much of which is picked by forced labor.

The State Bank of Vietnam devalued the dong against the dollar by 1% in June for the second straight year. Although the devaluations are aimed at boosting exports, they also raise the price of imports. In March the central bank cut a series of key interest rates to stimulate economic growth. The country’s 6.6% inflation rate last year was the lowest in a decade. “Returning the banking system to health is critical,” HSBC says. Vietnam needs to restructure state-run firms, recapitalize the banking system and improve its financial system regulation to reduce nonperforming loans, according to HSBC.

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