Roundup of less developed economies’ central bank policies

With so much going on in terms of central bank policy innovation and change, it seemed sensible to write up where we are now and when the next meetings take place – in this paper we look at key less developed economies.

Country	Current	Next meeting
Russia	5.50% (1-week direct REPO minimum auction rate)	1–15 June Last move: +25bp Sep ’12	The central bank (CBR) left the main policy rates unchanged at its meeting on April 2 while cutting rates for loans with longer maturities by 25bp (for the second time in a row). The May statement was fairly dovish but only marginally more so compared to the previous one, emphasizing the slowdown in growth and lower inflation risks in 2H. Although the statement was not indicative of any imminent action, it did leave the door open for more pronounced policy easing if real sector data surprise on the downside. We are keeping our forecast for 50bp in key policy rate cuts in 2013 starting from June or July.
South Africa	5.00% Repo rate	July 18 Last move: -50bp Jul’ 12	The Reserve Bank is inclined to be pre-emptive in support of the economy, if fragile growth is threatened and if the prospects for inflation have improved. In our view, both of these risks have emerged. We think that the MPC will cut the repo rate by 50bp to 4.50% at its meeting on July 18. We expect that rates will be cut despite monetary conditions having already eased sharply over the past  year  and  despite  the  fact  that  the  premium for  real  ZAR exposure has declined. Domestic inflation remains weak and the prospects for lower inflation in 2H 2013 are still good, in our view.
Turkey	4.50% one-week repo3.50% -6.50% overnight interest rate corridor	June 18  Last move: -50bp on 16.05.13	Although the still-rapid credit growth and the deterioration in core inflation dynamics since late last year argue against further monetary policy stimulus, the MPC cut all short-term interest rates by 50bp in May as in April, in response to appreciation of the lira. An outright increase in the reserve requirement ratios (RRRs) for the banks’ FX-denominated liabilities introduced an element of tightening, which was not part of the April policy mix. However, we continue to question the RRRs’ effectiveness in slowing credit growth. If the lira’s nominal basket exchange rate hovers around 2.09-2.10 throughout June, the MPC might refrain from lowering the short-term interest rates further at its next meeting on June 18.
China	6.00% 1-year lending rate	Last move:-31bp on 05.07.12	Inflation is probably the most important monthly indicator to watch over the next 12-18 months, in our view, as it may force the central bank to alter the monetary policy stance. We expect both deposit and lending rates to be lifted three times at a rate of 25bp each quarter until Q2 14, although overall liquidity conditions remain accommodative.
India	7.25% Repo rate	Jun 17  Last move:  -25bp on 03.05.13	The RBI cut the repo rate by 25bp, while leaving the Cash Reserve Ratio unchanged, as was widely expected during its May meeting. The RBI’s accompanying statement suggested that the scope for further rate reductions remains “quite limited”, as the bank continues to be concerned about consumer price inflation and the current account deficit. At the same time, its outlook for economic growth is more bearish than most. We continue to look for another 50bp of repo rate reductions by the end of the calendar year as inflation continues to surprise on the downside and the current account deficit improve s more sharply than generally expected.
Indonesia	5.75% Overnight rate	Jun 13  Last move: -25bp on 09.02.12	Bank Indonesia cut rates by 100bp between October 2011 and February 2012, but that seems likely to be it. In fact, at its May meeting, the central bank raised rates on BI bank bills and term deposits to mop up some excess liquidity in the system and on August 10 hiked the lower end of its interest rate corridor (the FASBI rate) by 25bp to 4% in response to very poor Q2 current account data. We very much doubt the central bank will raise the politically sensitive BI rate until it is forced to, perhaps because of a sharp rise in inflation.
Korea	2.50% Overnight rate	Jun 13  Last move: -25bp on 09.05.13	The Bank of Korea cut its benchmark policy base rate by 25bp to 2.5% in the May meeting. As growth and inflation may trough and show a mild recovery in the coming quarters, it looks as if the risk for further rate movement, at least for this year, should be roughly neutral. That said, we expect that the policy rate will be kept on hold at 2.5% for now, with concern over high household debt levels lingering at the back of the minds of the policymakers and likely constraining any rapid monetary easing. Pressure for further rate cut may rise if we do not see a recovery in macro-economic data in the coming two quarters, and if inflation continues to stay sluggish during the period.
Malaysia	3.00% Overnight rate	Jul 11 Last move: +25bp on 05.05.’11	While the inflation situation gives the central bank room to cut rates if it wants to, robust GDP growth and strong domestic demand growth momentum mean that it is unlikely to be in a rush to do so. In addition, BNM may be reluctant to add to an already expansionary fiscal policy ahead of the general election. Overall, it looks likely that the central bank will keep the policy rate at 3% this year, with the balance of risk tilting towards hiking rather than easing.
Philippines	3.50% Reverse Repo Rate	Jun 13 Last move: -25bp on 26.07.12	The Philippines’ central bank (BSP) kept the policy rate unchanged but cut the Special Deposit Account (SDA) rate at its last meeting. More macro-prudential measures may be imminent in an effort to curb speculative real estate activity.
Taiwan	1.875% Overnight rate	Jun 20 Last move: +12.5bp on 30.06.11	There could be a rate cut if global growth falters later in the year but with growth seeing a cyclical improvement, we do not think that the CBC will cut the policy discount rate soon, instead retaining its option to cut if required.
Thailand	2.75% Overnight repo rate	May 29  Last move: -25bp on 17.10.12	The Thailand central bank kept its policy rate on hold at 2.75% in its latest meeting and the MPC may not cut rates in 2013 given that GDP growth is strong, inflation may surprise on the upside, household debt is strong , with private credit reaching 20.4% y/y in December last year and the bank will want to re-affirm its independence of government and political pressure.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla