Friday, September 12, 2008

Central Bank Watch

Let's take a look at what a few of the Central Banks have been up to.....


Inflation is a big problem in Argentina. Although the official statistic's say it is running at 9% (within the 9-11% band the CB wants) in reality it is much higher. Independent economist's gauge inflation at about 20% and rising steadily over the next 12 months. An independent central bank would be in a rate rise environment but although stated as such in reality they are not. The currency policy is one of a weak currency (although based on the last 6 months it would be hard to see that)to boost exports and as such the CB intervenes regularly. We the current strong dollar environment I think there is real potential for a weaker Peso. 20% weaker (current implied interest rates through the NDF) I am not so sure.


I would have said they were on the hawkish side, but after the rate announcement yesterday I am not so sure. The vote yesterday had three members looking for only a 50bp rise in rates. I think this comes from the most recent CPI data which showed a slowing of the index thanks in part to lower food and energy prices. The minutes from the last CB meeting (not yesterdays) were quite hawkish, but the market is now looking at the strong possibility that rates might now go another 50bp by year end as was previously expected. Rates along the curve today came off, could this be a sign of things to come?


Definitely hawkish. They last raised rates 50bp on Sept 4 as expected. This marked the fourth time in a row they moved 50bp. The statement coming out after the meeting, suggested that they were looking for continued strong growth to go along with the higher rates.


Neutral, at the last meeting the Central Bank held rates steady at 10% (Aug 15). This decision was unanimous. They seem to be in a similar situation to us, a slowing economy and rising inflation. The next move in rates is probably down but that might not be for a few months. The CB's inflation target is 4%.


Neutral. At its last meeting on Aug 15 the CB raised rates 25bp to 8.25%. This time around however the post meeting statements were pretty dovish. The market took that to mean that they would be on hold. Banxico feel that medium term inflation expectations are anchored (despite recent higher then expected inflation numbers), and as such are willing to wait and see what happens with the strength of the economy. Mexico is quite concerned of the spillover effect that the U.S. slowdown will have on them (look at Europe and Asia...). Bottom line is that Mexico feels they are nearing the end of this inflation cycle and as such rates should be on hold.


The Central Bank has been in a rate rise environment since July 2007, in which they have raised rates 175bp. The last hike was on August 7. Rates currently are at the highest level in five years. In the statement following the last meeting the committee said it would pay attention to inflation expectations and demand side drivers of inflation. Hawkish yes, but remember crude is coming off hard and with it SHOULD come inflation.

Good Luck and Good Curreny Trading.



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