global central banking in 2014, a first quarter update for 23 economies - real time economics - wsj

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4/23/2014 Global Central Banking in 2014, A First Quarter Update For 23 Economies - Real Time Economics - WSJ

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April 2, 2014, 7:31AM ET

Bloomberg News

Join WSJs Hilsenrath and Blackstone for a live video chat about the ECB and other global central

banks Thursday at 2 p.m. EDT http://bit.ly/Pdpysf

The worlds central banks have navigated different currents in the first quarter of 2014 and are preparing themselves for a

variety of challenges in the months ahead. Developed economies such as the U.S., Europe and Japan are stillstruggling with slow growth and uncomfortably low inflation. The Bank of England is holding interest rates low even as

the U.K. recovery picks up steam. Emerging markets are bracing themselves for the Federal Reserves gradual winding

down of its extraordinary stimulus measures. Chinas central bank has engineered a depreciation of its currency, the

yuan, amid signs of rising economic stress. Everybody is watching to see if the conflict between Russia and the West

over Ukraine spills over to hurt the global economy.

Heres a guide to the individual outlooks for central banks around the world, compiled by our global staff of

reporters and editors. Follow the links for more. And if youre still hungry, download our free e-book on new

Fed Chairwoman Janet Yellenat www.wsj.com/fed.

U.S. Federal Reserve

European Central Bank

Bank of Japan

Bank of England

Peoples Bank of China

Reserve Bank of Australia

Central Bank of Brazil

Bank of Canada

Czech National Bank

Global Central Banking in 2014, A First QuarterUpdate For 23 Economies
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http://blogs.wsj.com/economics/2014/04/02/global-central-banking-in-2014-a-first-quarter-update/tab/print/ 2

Danish National Bank

Hungarian National Bank

Reserve Bank of India

Bank of Indonesia

Bank of Israel

Reserve Bank of New Zealand

Norges Bank

National Bank of PolandBank of Russia

South African Reserve Bank

Bank of Korea

Swedens Riksbank

Swiss National Bank

Central Bank of T he Republic of T urkey

U.S. Federal Reserve

By Victoria McGrane

Janet Yellen took the helm of the Federal Reserve in February and appears to be steering it on a steady

course for now, despite uncertainty about the exact timing of policy moves looming in the distance.

She and her colleagues indicated at their March policy meeting, her first as chairwoman, they are likely to

leave short-term interest rates near zero until next year. They also continued to scale back their monthly

bond purchases in $10 billion increments at recent meetings and indicated they are likely to keep going and

end them completely by later this year if the economy improves as expected.

One change under Ms. Yellen was the Feds new guidance about the likely path of short-term interest

rates, which put less weight on the unemployment rate as a marker for when rate increases will start.

Before the March meeting, the Fed had said it would start considering interest rate increases from near

zero when unemployment fell to 6.5%, as long as the outlook for inflation remained below 2.5%. At the

meeting, Fed officials dropped these numerical thresholds and said instead they would look at a broad

range of economic information in deciding when to raise rates.

Just when that process might start will be the subject of great debate.

Ms. Yellen said in her inaugural press conference March 19 that the bond-buying program likely would end
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in the fall. That could mean it would end at meetings scheduled for either Oct. 28-29 or Dec. 16-17. The

distinction matters to investors because the end of the bond-buying program is linked to the Feds interest

rate plans.

The Fed said interest rates will remain near zero for a considerable time after the bond-buying program

concludes. Ms. Yellen stirred up concern in markets when she suggested that the first rate increases might

come about six months after the end of bond buying. While her projection came with many caveats, some

investors took it as a sign that the Fed could start raising rates as early as April 2015, somewhat sooner

than expected.

Several Fed officials have since stressed that six months is not a firm timeframe for their interest rate

decision, which will depend on how the economy performs. And Ms Yellen emphasized in a speech in late

March her continued strong support for the Feds easy money policies, saying, I believe it is appropriate for

the Federal Reserve to continue to provide substantial help to the labor market.

Fed officials remain generally upbeat in their economic forecasts, despite signs of weakness in the winter

that appeared at least partly due to harsh weather in some parts of the country. But they will be watching

carefully for any signs of underlying softness that could hold back a rebound in coming months. One issue

they are watching closely is inflation, which has remained well below their 2% target for 22 months.

European Central Bank

By Brian Blackstone

Talk is cheap.

That was the main lesson for European Central Bank officials from the first quarter. They did a lot of talking

about being ready to act with rate cuts or other stimulus measures, having a suite of instruments at their

disposal and even expressed concerns about the high value of the euro, a rarity for central bankers who

typically shy away from commenting on currencies.

But they took no new steps and investors fretted about their resolve to keep inflation at the ECBs 2%

target. The euro pushed higher toward $1.40 in recent weeks, a level that threatens to make already super-

low inflation rates even lower.

Annual inflation weakened further in March to 0.5%, the lowest rate since late 2009. This may force the

ECB to weigh action as soon as its April 3 policy meeting. Most analysts think they will stand pat again,

however, given that an unusually warm winterwhich reduced energy and food pricesand the late timing

of the Easter holiday were a temporary drag on prices

Of the ECBs remaining toolsinterest rate cuts, bank funding measures and large-scale asset purchases

rate cuts would likely be the first option. This may include reductions in the banks 0.25% main lending rate

and, more significantly, the deposit rate, currently zero.

Installing a negative deposit ratewould put the ECB in largely unchartered waters for a major central bank.

By effectively charging financial institutions to park overnight funds, the ECB might spur them to lend more

to the private sector. The euro would probably weaken considerably if the ECB crosses that Rubicon.

Central bankers in Finland and Germany, who are considered among the most conservative of the ECBs
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24-member council, have signaledthey are open to this option. Going this route could then open the door to

purchases of government bonds or, more likely, private-sector assets later this year if deflation risks

intensify further.

The April 3 meeting will set the tone. If officials act on rates or take other measures, investors would have

to reassess their view of the ECB as an overly cautious central bank loathe to joining the Federal Reserve

and Bank of Japan in experimenting with innovative stimulus measures.

If they hold fire again, their easing bias on interest rates and repeated pledges to act if needed could ringhollow.

Bank of Japan

By George Nishiyama

A year after rolling out monetary easing of a different dimension to bring an end to persistent deflation,

things are looking good for the Bank of Japan as moderate inflation appears to have taken hold.

Data released in late March showed that the core consumer price index rose 1.3% in February from a year

earlier, the third straight month of gains and a faster pace than most private economists had predicted.

But the BOJs mission to achieve 2% inflation in two years will face its biggest challenge in April, when the

national sales tax goes up to 8% from 5%, a move certain to drag down consumption and put downward

pressure on growth and prices.

BOJ Gov. Haruhiko Kuroda has contended that any economic slowdown will be temporary. But the fiscal

crunch comes in the absence of a strong pickup in exports, which BOJ officials had hoped would offset

weaker consumption.

Mr. Kuroda believes exports will increase once emerging economies recover, but many private economiststhink that with structural changes such as Japanese manufacturers producing more overseas, any

rebound will be limited.

And the yen, whose fall of about 9% in the past year contributed to inflation by pushing up import prices,

has recently stabilized, meaning less upward pressure on prices.

So while the BOJ is sticking to a bullish outlook for prices saying the CPI excluding the effects of the tax

increase will head toward 2% after the end of the year many private economists arent so sure. They see

the inflation rate falling after April and staying below 1% for the rest of the year, forcing the BOJ to take

fresh action.

A survey of 40 economists by the private Japan Center for Economic Research showed that 36 thought the

BOJ would have to ease again, with 14 expecting action around July.

Bank of England

By Jason Douglas

The Bank of England is expected to stay on cruise control through 2014 but dont be surprised to see

deepening divisions emerge among officials over how far they can push the U.K. economy before inflation


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starts to take off.

The BOEs Monetary Policy Committee has kept its benchmark interest rate at a low of 0.5% since March

2009. With growth finally accelerating after a long stagnation, traders expect officials to begin the slow

process of dismantling the extraordinary stimulus thats been in place for the past five years by raising

rates early next year.

A critical judgment officials must make is how much slack there is in the U.K. economy. Spare capacity

for example, idle workers or factories usually means an economy has space to expand quickly withoutgenerating inflation. Wait too long and the central bank might have to take drastic action to curb price gains;

move too soon and they could kill the recovery.

BOE officials said in February they reckoned the size of the shortfall was equivalent to between 1% and

1.5% of annual output. By keeping rates pinned near zero, officials hope to spur a quicker recovery and

begin closing that gap.

But since they published that estimate it has become clear that there is a bigger range of opinion on the

size of the gap than first appeared. Governor Mark Carney told lawmakers he thinks there might be more

slack in the economy than that estimate implies; rate-setter Martin Weale has said he thinks theresprobably less.

BOE officials are still setting policy under their August guidance, by which they pledged not to consider a

rate rise at least until unemployment reached 7%. That threshold is likely to be crossed within months, after

which these differences of opinion may spill over into outright disagreement on when to let borrowing costs

rise. The BOE is also absorbing an influx of new blood on the committee: three new officials will be joining

the panel within months.

Also on Mr. Carneys agenda in the months ahead: how to tame a potential housing boom. The Canadian-

born governor has said the central bank will reach for its range of macroprudential tools to cool themarket if a real-estate bubble forms.

Peoples Bank of China

By Bob Davis

Chinas central bank got its reform mojo working in the first quarter in a very Chinese way. It engineered a

depreciation of the yuan through heavy government intervention. Then it doubled the trading band of the

yuan to 2% from the days starting point and let market forces go to work. With the Chinese economy

headed downward, so did the yuan. Peoples Bank of China as market champion.

Now what? If the PBOC is really committed to letting the market have its way, the yuan might drop further.

Thats bound to alarm members of the U.S. Congress, among others. In a U.S. election year, long-

threatened sanctions on Chinese currency manipulation could pass both chambers. The PBOC realizes

that; most analysts figure if the yuan doesnt start strengthening on its own in the second quarter, the

PBOC will intervene to buck up the currency somewhat.

Having introduced uncertainty into currency trading, the PBOC seems poised to encourage it elsewhere in

the financial system. That means lobbying the government to look the other way when some bonds default

perhaps even one or two issued by a state-owned firm and letting investors take a hit.


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It could also mean starting to begin to put in place a bank deposit insurance scheme. In a system where

everyone figures the government backstops everything, insuring only certain deposits up to a certain level

probably 500,000 yuan (about $80,000) should put investors and institutions on alert that they better

weigh risks far more carefully than they have in the past.

Reserve Bank of Australia

By James Glynn and Rachel Pannett

Australias central bank governor Glenn Stevens is flying in a holding pattern, waiting for signs the economy

is recovering after a slowdown in the once-booming resources sector.

The central bank slashed interest rates to a record-low 2.5% last August as a long mining boom faded. The

Reserve Bank has indicated rates will stay there for some time: many economists forecast the first rate

hike wont come until 2015.

The countrys jobless rate hit 6% in January, the highest level in more than a decade, as workers lost jobs

in mining, oil and gas industries. Business conditions and consumer sentiment have also deteriorated

recently.

The economy expanded by 2.8% in 2013, down from growth rates as high as 4% in early 2012.

Still, a string of more upbeat data, including rising house prices and a sharp pickup in building approvals,

has buoyed hopes of a recovery in construction. Nationally, house prices rose almost 10% last year, the

strongest gain since 2010.

The central bank said in March it was monitoring a surge in speculative lending for property, saying the

sector by some measures is registering boom-like conditions. With roughly 40% of home loans now going

to investors it is worried that unrealistic expectations of price gains are building. We remind people that

house prices can go down as well as up, the bank said in March, in its twice-a-year review of financialstability.

The central bank doesnt want to raise rates to dampen house prices, because that could undercut a

revival of retail spending and construction.

Central Bank of Brazil

By Paulo Trevisani

The Central Bank of Brazil pressed on with rate hikes in the first quarter as inflation showed little sign of

easing. The institution raised its benchmark Selic rate to 10.75%, with increases in January and February.

With inflation well above the central banks 4.5% target, it is expected to raise the Selic again in early April.

Many analysts expect the rate to reach at least 11% by yearend, though it may go higher. That could lower

the outlook for economic growth, now a meager 1.69% this year.

In the currency market, central bank President Alexandre Tombinis team continued its intervention through

the use of derivatives contracts even though it says much of the impact on Brazil from the decision by the

U.S. Federal Reserve to reduce its bond-buying program has been absorbed. As of late March, there were

$87.2 billion of swap contracts outstanding, up from $75.1 billion at the end of 2013.


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The Brazilian real rallied in March, ending the month at around BRL2.27 per dollar from above BRL2.40 in

January. Such strength helps the inflation battle but may hurt exports, further dampening growth, and some

believe the central bank could look to curtail its intervention at some point.

Bank of Canada

By Nirmala Menon

The Bank of Canada has kept interest-rate cuts on the table amid persistent low inflation. But if consumerprices pick up and a stronger U.S. economy lifts demand for Canadian exports, Governor Stephen Poloz

might have to dial back the dovishness.

Mr. Poloz will have to be careful not to fire up the Canadian dollar in the process, jeopardizing a much-

needed export revival that is expected to help drive Canadian growth this year. Mr. Poloz has described the

weakening of the currency, which came after he abandoned the central banks rate-hike bias last fall, as

icing on the cake of improving U.S. demand.

First-quarter inflation is already tracking higher than the Bank of Canada predicted in January, and may

return to the central banks 2% target as early as April, according to Jimmy Jean, economic strategist at

Desjardins Capital Markets. Strengthening prices will force the central bank to put less emphasis on

downside risks to inflation, or Mr. Poloz might be branded a permanent dove, Mr. Jean said.

The Bank of Canada may raise concerns if signs re-emerge about a dangerous household debt buildup,

but it is likely to leave it to the Canadian government to handle potential risks on that front. Ottawa tightened

mortgage insurance rules four times between 2008 and 2012 to cool the housing market and rein in

household debt.

Mr. Poloz is expected to pull the rate-hike trigger next year at about the same time as the U.S. Federal

Reserve if domestic consumer prices and exports keep strengthening. But he may wait until 2016 if the

expected shift to an exports-driven economic expansion remains elusive.

Czech National Bank

By Leos Rousek

The Czech central banks regime of super low interest rates and a weak koruna are likely to stay in place

until early 2015 and possibly beyond as slack consumer demand keeps the countrys annual inflation rate

well below the 2% target.

Speaking after the late March meeting of the banks monetary policy board, Governor Miroslav Singer said

the central bank is ready to extend its weak-koruna policy for even a longer period if the economic recovery

remains fragile and more easing is needed.

Even if the bank starts winding down its weak-currency regime next year, it is unlikely to raise its

benchmark interest rate from a record low of 0.05% at the same time, some analysts expect.

The bank is likely to deliver its first rate hike in the first quarter of 2016, or more than three years after

cutting the headline interest rate to almost zero, said Jiri Skop, an analyst at the Czech unit of Societe

Generale bank.


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Seeking to counter the threat of deflationor a period of falling pricesthe Czech central bank has pledged

to keep the koruna at around 27.00 to the euro, or about 6% weaker than before launching its 7.4 billion

($10.2 billion) currency intervention in November.

Danish National Bank

By Charles Duxbury

Central bank officials in Copenhagen will be keeping a close eye on Frankfurt over the next few months.

Denmarks central bank has been watching the krones value closely to meet a target of exchange rate

stability against the euro.

A recent weakening of the Danish currency got analysts wondering whether the bank might intervene in the

currency market in the short term and even raise rates in the medium term, but such action hasnt been

taken.

For now the central banks ultra-low policy rateswhich include a negative rate on bank depositsare likely

to remain stable. But if the euro shows signs of moving higher or lower over the coming months the Danish

central bank can be expected to react quickly.

In that sense, Denmark is heavily dependent on what the European Central Bank does, even though

Denmark isnt a member of the euro. If the ECB installs a negative rate on bank deposits, weakening the

euro, it could force Denmark to respond with steps to cheap its own currency, including moving its deposit

ratecurrently 0.1%further into negative territory.

After all, it was a rise in the value of the krone against the euro, as investors sought a safe have in

Denmark during the worst of the euro zone crisis, that triggered the cut to a negative deposit rate in the first

place back in July 2012.

We will do whatever it takes to protect the peg, Governor Lars Rohde said in an interview last year. The

one and only role for Danish monetary policy today is to secure the peg.

Hungarian National Bank

By Margit Feher

Hungarys central bank is likely to reduce its benchmark interest rate from a record low of 2.6% early in the

second quarter, extending an period of rate cuts that has already run over 20 months.

Following their most recent decision to cut interest rates in March, policy makers said that only a markeddeterioration in sentiment in international markets would stand in the way of further easing.

Analysts warn that while further cuts will have little impact on growth, they could threaten financial stability,

raise the countrys financing costs, and weaken the local currency.

But with an election approaching, the central bank is committed to doing what it can to support feeble but

accelerating growth.

A weaker forint would raise the debt payment obligations of the about half a million Hungarian households

holding mortgages tied mostly to the Swiss franc, and also that of the government, 40% of whose debt is


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denominated in a foreign currency.

The central bank has become increasingly tolerant of a weaker forint and some analysts reckon that may

foreshadow a government effortif the current governing Fidesz party wins a second consecutive term in

power in line with the latest opinion pollsto try to boost growth later this year with an even softer currency.

Reserve Bank of India

By Raymond Zhong

Reserve Bank of India Gov. Raghuram Rajan started the year with a jolt, raising interest rates in January to

8% from 7.75% in a surprise move that briefly sent stocks tumbling. For now, Mr. Rajans shock tactics

seem to be paying off.

Inflation in Asias third-largest economy eased in January and February, after both consumer- and

producer-price growth accelerated in the second half of last year despite slower economic growth. The

rupee, after an embattled 2013, has stabilized against the U.S. dollar. Imports have fallen and the trade gap

has narrowed.

All of this has helped repair investor confidence in India, which still depends on inflows of foreign capital to

fund trade and government-budget deficits. At the central banks April meeting, its second of the year, it left

interest rates unchanged, citing a sizable fall in headline inflation.

But Mr. Rajans hawkish leanings arent universally beloved.

The central bank also said at its April meeting that it will officially use consumer-price inflation as a guide for

monetary policy. For now, the objectives are 8% inflation by January 2015 and 6% by January 2016a so-

called glide path for inflation rather than a long-term target. But that still marks a shift away from the RBIs

previous approach of looking at more than one indicatorinflation, growth, exchange rates and others

when it sets its policy rate. The move suggests the central bank will look to keep monetary policy tight forthe next few months until inflation is brought down.

Critics of the inflation targets argue that a developing country like India cant afford to fetishize price stability

at the expense of economic growth.

The International Monetary Fund expects Indias economy to expand by 5.4% in 2014. Thats up from 4.4%

last year but still far off the 7.7% average yearly growth of the decade before. Mr. Rajan has said repeatedly

that he doesnt believe theres a tradeoff between inflation and growth.

Bank Indonesia

By I Made Sentana

Indonesias central bank has kept policy on hold since December, but officials warned they would raise

interest rates if capital outflows resume or domestic inflation remains above the central banks year-end

target of 5.5%.

We dont want to be complacent, Senior Deputy Gov. Mirza Adityaswara said March 24.

Indonesia has attracted some $5.5 billion of foreign funds into its capital markets so far this year, pushing


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up the rupiah more than 7% and making it the best performer among emerging-market currencies.

Bank Indonesia Gov. Agus Martowardojo warned that Indonesias current-account deficit, the broadest

measure of trade, could widen again in the second quarter due to offshore debt repayment and profit

repratriation by multinational companies operating in Indonesia. If that happens, he said, Bank Indonesia

would again prioritize stability over growth.

Mr. Adityaswara said inflation, which had declined since last summer to 7.75% in February, could pick up

again later this year if drier weather expected to affect Southeast Asia drives up food prices. Higherelectricity prices also could stoke inflation.

Bank of Israel

By Josh Mitnick

Israeli central bank governor Karnit Flug didnt wait long to surprise observers on interest rate policy.

Despite expectations that she would keep monetary policy unchanged for the first half of 2014, she cut the

central banks lending rate by 0.25 percentage point in February to boost economic growth.

For the remainder of 2014, the outlook for stable rates has not changed, say economists. Cutting rates

further may spur an already frothy real-estate sector. But raising them may boost Israels currency, the

shekel, and weaken the countrys dominant export sector.

Its very boring, but I think thats the most reasonable forecast at the moment, said Jonathan Katz,

economist at Leider Holdings and Investments.

Economic activity has started to pick up, making additional rate cuts less urgent. Ms. Flug may also be

cautious due to uncertainty over a new plan by Finance Minister Yair Lapid to give tax relief to would-be

home buyers struggling amid the countrys surging real estate market. The concern about the yet-to-beapproved policy is that the tax break will kick up more demand amid a housing shortage, boosting prices

even more.

There is an outside chance for a rate cut if the central bank chief is concerned that Israels export sector is

being hurt by the strong shekel, said Vered Dar, chief of the investment committee at Excellence Nessuah

Investment House.

The shekel is way too strong, and currently thats what the Bank of Israel is most concerned about, she

said.

Reserve Bank of New Zealand

By Rebecca Howard

New Zealands central bank in March raised interest rates for the first time in almost four years, breaking

from other developed nations that are still emerging from the global financial crisis.

The reasoning was straightforward. After three years at a record-low 2.5%, rates were simply too low for

an economy steaming ahead, stoked by growing Chinese demand for dairy products and a construction

boom as rebuilding intensifies after a 2011 earthquake. Consumer sentiment and retail sales are robust


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and employment is improving.

It is necessary to raise interest rates towards a level at which they are no longer adding to demand,

Reserve Bank Gov. Graeme Wheeler said March 13. New Zealands economic expansion has

considerable momentum, and growth is becoming more broad-based.

The quarter percentage-point hike, to 2.75%, is expected to be the first of many: The Reserve Bank of New

Zealand is unusually open about its plans. The 90-day bank bill track, widely considered a proxy for interest

rates, shows it plans to raise interest rates by around 2 percentage points over the next two years.

The rate increase, while expected, sent the nations currency to its highest level against a basket of major

currencies since it was floated in 1985underscoring the risks to the export-dependent economy of acting

ahead of the pack.

Norges Bank

By Charles Duxbury

Norway is an anomaly among developed economies in Europe, the U.S. and Asia. Inflation is near its

target, and while other central banks protect fragile recoveries and guard against too-low inflation, Norway

expects a soft landing.

As a result, Norges Bank has kept a low profile over recent months sticking to a policy mix of unchanged

rates and regular postponements of rate rises which it signals explicitly with its forward guidance. The

benchmark interest rate has been at 1.5% for two years now.

The bank stuck largely to its tried and tested script in a statement March 27 but reiterated its plan to raise

rates next summer rather than move higher borrowing costs further into the future.

Given our rate path, well maybe be a little bit earlier than some other central banks in hiking rates, thebanks governor Oeystein Olsen told The Wall Street Journal.

The market found that it a bit hawkish and the krone rose a little against the euro. Still the Norwegian

currency remains well below the highs it hit when investors were seeking safe places to invest during the

worst of Europes recent economic crisis.

There is little reason to think that the central bank will change policy over the months ahead as its forecasts

for slow but steady growth and inflation close to its 2.5% target are proving close to the mark.

A rapid appreciation of the krone in the wake of further ECB easing could change the balance, but for now

Norges Bank is on autopilot.

National Bank of Poland

By Patryk Wasilewski

Polands central bank is expected to keep borrowing costs at an all-time-low longer than believed likely only

a few months ago amid uncertainty about economic impact of a territorial dispute between the countrys

Eastern neighbors Russia and Ukraine.

A dovish shift in the banks 10-strong rate setting panel was clearly visible in recent weeks with most


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members arguing there is no need to change rates this year as the conflict over Crimea could potentially

dent Polish exports to its eastern neighbors and hit growth prospects in the second half of the year.

Monetary Policy Committee member Andrzej Bratkowski is the exception, arguing that a rate increase is

still possible in the fourth quarter of this year if the economy shows signs of potential inflation pressures.

In March the panel surprised the market with a promise to keep the benchmark interest rate unchanged at

current 2.5% level at least until September after its inflation and growth forecasts showed the economy

doesnt need any additional monetary stimulus.

According to the updated forecasts, the annual rate of inflation will reach the central banks 2.5% target

sometime in 2016 while economic growth is seen accelerating to 3.6% in 2014 and 3.7% in 2015 from

1.6% in 2013 and remaining only slightly below what the central bank sees as the countrys inflation-neutral

growth rate.

Bank of Russia

By Andrey Ostroukh

The Ukrainian crisis became a major game-changer for the Bank of Russia, forcing it to step up

interventions in the currency market and tighten monetary policy despite flagging economic growth.

The central bank had been widely expected to gradually ease monetary policy this year and grant the ruble

more freedom before fully switching to inflation targeting policy in early 2015.

But then the crisis in Ukraine escalated. On March 3, when the ruble dropped to all-time lows, the central

bank unexpectedly raised interest rates by 150 basis points and changed the intervention mechanism,

selling more than $11 billion in just one day to limit the fall.

The central bank is expected to change course and cut rates while trimming the amount of interventionsonce the Ukraine-related market turmoil subsides. Given the fluid nature of the crisis, changes to the

central bank policy are possible at any time, including April 25 when the central bank has long been

planning to hold a rate-setting meeting.

According to the economy ministry, Russias economy may grow just 0.6% this year. It could shrink 1.8% if

tensions escalate and sanctions bite enough to push net capital outflow to $150 billion, more than double

last years pace.

Rate cuts may help, but the case isnt clear cut. Global investors have pulled capital from Russia and lower

interest rates could make matters worse.

Bank of Russia officials say they will still stick to their plan to stop targeting the ruble exchange rate and

begin targeting inflation in 2015. But the central bank reserves a right to intervene in order to support

financial stability if the exchange rate drops dramatically.

South African Reserve Bank

By Patrick McGroarty

The first quarter was a turbulent one for South Africas central bank. It was at the center of the financial


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turmoil that gripped many emerging markets in January and forced it to hike a key lending rate from a four-

decade low of 5%, to 5.5%, to keep capital from fleeing the country.

A pause at the central banks March rate-setting meeting, amid recent calm in emerging markets, left some

economists worried that additional rate increases might not come fast enough to draw investors back to a

beleaguered currency.

Reserve Bank Governor Gill Marcus said on March 27 that the bank was leaving rates on hold because

economic growth keeps falling short of the banks forecastsshe cut her growth outlook for this year to2.6%, from 2.8% previously.

But she said persistent weakness in South Africas currency, the rand, and forecasts for the inflation rate to

push above the banks 6% target ceiling in the second quarter meant the bank would have to push rates up

sometime soon.

We are indicating that interest rates are likely to rise in the future, she said.

Many economists expect another two or more rate increases to at least 6.5% sometime next year.

A lot depends on the U.S. If the Federal Reserve raises interest rates sooner than expected, South Africa

might be forced to make robust rate hikes to help the rand bounce back from a 20% tumble against the

dollar in the last year.

South Africas ability to sustain an ultra-accommodative monetary policy, in order to help the economic

recovery along, will be limited, said Razia Khan, head of Africa research at Standard Chartered.

Bank of Korea

By Kwanwoo Jun

The big question in South Korea is whether the central bank will raise rates this year after keeping its policy

rate steady at 2.5% for 10 months through March.

The Bank of Koreas new governor, Lee Ju-yeol, 61, a career central banker, takes the helm in April.

Some observers say a rate increase is now possible in coming months.

An improving economic picture in the U.S. has raised expectations of higher U.S. rates in the future and a

strengthening dollar against Koreas currency, the won.

That could push the BOK to raise rates to stem capital outflows and to ensure inflation doesnt pick up via

higher prices of imports.

Koreas export-led economy also is set to expand at a faster rate as demand in industrialized nations

recovers. The central bank expects growth of 3.8% in 2014, up from 3.0% growth last year, and inflation to

accelerate to 2.3% from 1.3% in 2013.

Nomura economist Kwon Young-sun says a weaker won could boost exports and growth, pushing the

BOK to raise its base rate in September.

But J.P. Morgan economists dont expect a rate hike in 2014. They say large capital outflows are unlikely


14/16



given Koreas stable balance of payments, even if U.S. yields rise.

The bank also points out that any depreciation in the won will be matched by declines in the currencies of

Koreas main trading partners in Asia. On a trade-weighted basis, the won is unlikely to fall much, the bank

surmises.

Swedens Riksbank

By Charles Duxbury

Swedens Riksbank has started 2014 where it ended 2013 in a policy dilemma.

Inflation is low and household debt levels are high and rising. This is pulling the six-member central bank

policy board in different directions on what to do with borrowing costs.

The Riksbanks forecasts from February signal unchanged rates until early next year and analysts still see

this to be the most likely scenario.

Inflation in January and February stayed low. But the inflation outlook is probably not bleak enough to trigger

a rate cut at the next policy meeting in April, analysts say.

Still the central bank may choose to signal that rate hikes will be longer in coming than previously expected

as a way to stimulate the economy and push up inflationary pressures.

Another development to watch: a split on the six-member Riksbank board. Some, including Governor

Stefan Ingves, are reluctant to cut the benchmark rate below its current 0.75%. They think such a move

would send a signal to already heavily indebted households that they can borrow even more and that this

could increase risks in the financial sector.

A dovish camp, led by Karolina Ekholm, counter that the Riksbank must pay more intention to the fact that

consumer price inflation is near zero and the banks inflation target set by lawmakers is 2%. She recently

said she wouldnt rule out calling for further rate cuts if inflation doesnt pick up.

A four-two division on the issue was entrenched for many months but has recently shown signs of breaking

down.

Specifically, one of the more hawkish four, Per Jansson, has since December expressed much more

concern about low inflation and said this is now his priority.

Swiss National Bank

By Neil MacLucas

The Swiss National Bank has kept monetary policyincluding interest rates near zero and a ceiling for the

franc-euro exchange rateon hold for more than two and a half years, and that wont change anytime soon.

But this doesnt mean the central bank will be on autopilot.

If the European Central Bank takes dramatic steps that weaken the eurosuch as negative interest rates

or large-scale asset purchasesthe Swiss ceiling of CHF1.20 per euro may be further tested. That may

force the SNB to again purchase foreign currencies to keep the franc from rising too much, something it

hasnt had to do since September 2012.


15/16



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The International Monetary Fund said recently the SNB may need to consider setting a negative rate on

bank deposits. SNB Chairman Thomas Jordan said that was a possibility, in an interview with The Wall

Street Journal.

The central bank imposed its franc-euro ceiling in September 2011 to head off the threat of deflation and

relieve exporters under pressure from the rise of the franc to near parity with the euro, the currency of the

biggest Swiss export market. The franc was about CHF1.22 per euro at the end of March, buoyed as the

crisis in the Ukraine and Crimea triggered safe haven demand for the currency. The relatively high value of

the franc means cheaper imported goods, which has resulted in mild deflation. Switzerlands overall price

level dropped by 0.1% in February, while the SNBs definition of price stability is a rate of less than 2%.

Still, economists dont expect any change to SNB policy until late 2015

Central Bank of The Republic of Turkey

By Emre Peker

Turkeys central bank entered 2014 battling international and domestic pressures that pushed it in opposite

directions.

Its government wanted easier monetary policies to boost growth ahead of elections. International investors

wanted higher rates to stabilize the lira and keep capital from fleeing the country.

Investors won that round after Turkey emerged as the epicenter of a rout in emerging markets at the start

of the year.

Policymakers in Ankara more than doubled a key interest rate to 10% at an extraordinary gathering just a

week after their January meeting, firmly establishing inflation as their main concern amid the liras 30%

plunge against the dollar that started fueling price increases across the board.

But the move was also criticized as too late, with Turkeys inflation hitting 7.89% in February, rising for a

fourth consecutive month and moving further away from the 5% official target.

Central bankers have pledged to keep money tight until they see a significant improvement in the inflation

outlook.

That could change later this year, with looser policies to boost economic growth forecasts, which were

halved to about 2% after the emergency rate hike, analysts said. The policies probably wont involve the key

interest rates amid uncertainty over U.S. Federal Reserve policies, which play a key role in Turkeys

financial markets and economy.

Rather, the central bank might start paying banks interest on deposits used to meet reserve requirements.

Lenders are also pressing the central bank to cut down reserve requirements. Another option is reducing

the amount of money banks need to set aside for loans.

These backdoor measures would raise liquidity, ease the burden on Turkeys banks and boost the

economy by supporting loans and credit card spending, economists said.


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global central banking in 2014, a first quarter update for 23 economies - real time economics - wsj

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