Home Central Banks Dovish Chile and Russia, Hawkish Georgia

Dovish Chile and Russia, Hawkish Georgia

Stockholm (Ekonamik) – Asides from Riksbanken, another five central banks met this week. While the Bank of Canada (BoC) and the Reserve Bank of Australia (RBA) kept rates on hold, the Central Bank of Chile (BCC) and the Bank of Russia (BoR) lowered its policy rates, while the National Bank of Georgia (NBG) increased them instead.

Chile and Russia Cut Rates

“At its Monetary Policy Meeting, the Board of the Central Bank of Chile decided to lower the monetary policy interest rate by 50 basis points, to 2.0%,” the BCC announced on September 3rd. “The decision was adopted by the unanimous vote of the Board members,” the central bank added.

The decision was motivated by the US-China Trade War, the increased likelihood of a no deal Brexit, the deteriorating situation in Argentina and the effects all of these developments are expected to have on the global economy. “The main development since the previous Meeting has been the worsening of the external scenario. Especially significant has been the escalating trade conflict between the United States and China, with an impact on other economies that are integrated into value chains and financial markets,” the central bank added. “Global activity continued to slow in an important group of economies, where the weakening of manufacturing stood out, while services activity remains dynamic. The deterioration is deeper for global trade volumes, which virtually stagnated, and for expectations indicators. The trade conflict is compounded by the greater likelihood of a non-deal exit of the United Kingdom from the European Union, various geopolitical risks and a severe deterioration of the situation in Argentina.”

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The Bank of Russia also cut its policy rate by 25bps to 7% on Friday, September 6th. Bank of Russia Governor Elvira Nabiullina gave 4 parallel reasons for the decision. “First, Annual inflation has already approached 4%. Our estimates suggest that as of the year-end it will fall within the range of 4.0-4.5%,” the governor explained. “Second, inflation expectations of households and businesses remain elevated. Third, monetary conditions are continuing to loosen. We expect that both previous and today’s key rate decisions will underpin this trend. Fourth, economic activity undershot the Bank of Russia’s expectations in the second and early third quarter. This results from internal and external factors. This made us revise our 2019 GDP growth forecast from 1.0-1.5% to 0.8-1.3%.”

Georgia Raises Benchmark

“The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on September 4, 2019 and decided to raise the refinancing rate by 0.5 percentage points to 7 percent,” the monetary authority announced.

According to the rest of the statement, it appears that the decision was mainly motivated by concerns about the pass-through effect that the currency depreciation is having on inflation. “In line with the previous decision of the MPC meeting, stating that if inflationary pressure driven by the exchange rate depreciation persisted, the Committee would consider monetary policy tightening, the Monetary Policy Committee decided to increase the policy rate by 0.5 percentage points,” the NBG explained. “Moreover, the Committee stands ready to further continue policy tightening until the pressures from exchange rate recedes.”

Australia and Canada Wait and See

“At its meeting today, the Board decided to leave the cash rate unchanged at 1.00 per cent,” RBA‘s Governor, Philip Lowe, announced on September 3rd. “Global financial conditions remain accommodative,” he added. “The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year and further monetary easing is widely expected. Long-term government bond yields have declined and are at record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at its lowest level of recent times.”

The decision was expected by Bill Evans, Chief Economist of Westpac. He also notes that it might be possible to use the RBA’s language to peek into the future. “A key signal around the Governor’s Statement following the decision next week will be whether the Governor continues with the wording ‘ease monetary policy further if needed’,” he explains. “‘If needed’ was used in both July and August and seemed to imply a degree of patience with rates remaining on hold at the August and, we believe, the September meetings,” he elaborated. “However, those words were not used in June and we saw a follow up move in July. If the ‘if needed’ is still used in the Statement then it will not necessarily preclude a move in October – it might be considered prudent to break with that signalling approach but an absence of ‘if needed’ will certainly be very encouraging for our October view.” No such expression was used by the RBA governor in the press release.

“The Bank of Canada today maintained its target for the overnight rate at 1.75%. The Bank Rate is correspondingly 2% and the deposit rate is 1.5%,” the BoC announced on September 4th. “In sum, Canada’s economy is operating close to potential and inflation is on target. However, escalating trade conflicts and related uncertainty are taking a toll on the global and Canadian economies. In this context, the current degree of monetary policy stimulus remains appropriate,” the BoC concluded.

The Canadian decision was “widely expected, and [the BoC] gave only some muted signals that a change may be in the offing,” noted Douglas Porter, CFA Chief Economist and Managing Director at RBC Capital Markets. “The tone of the Statement left the Bank with the option to trim this October,” depending on the evolution of the trade conflicts.


Image courtesy of Banco Central de Chile

Filipe Wallin Albuquerque
Filipe Wallin Albuquerque
Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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