• Points at high frequency indicators to show economy recovering fast
• Maintains year-end growth at 5.0% but doesn’t rule out risks from fresh COVID outbreaks  
• Recent easing seen in bond yields, deceleration in private credit prompt CB to make no change  
• Sees firming of aggregate demand but rules out need for hiking rates to address supply constraints

Capping weeks of expectations for a rate hike by certain quarters, the Central Bank decided to maintain the current monetary policy unchanged this week in a sign of bias towards supporting the recovery of the economy beset by the pandemic and told the current bout of inflation is, “transitory”. 

The Monetary Board, meeting for the eighth and the final time for the year this week left its benchmark deposit and lending rates at 5.0 percent and 6.0 percent respectively after taking into consideration a bevy of positive developments that took place in the economy since they finally decided to tighten policy on August 19, rolling back part of the pandemic era policy support. 

Since then, high frequency economic indicators improved, buoying the expectations for a fast rebound in the economy while some of the other economic readings pointed that they are responding to the earlier monetary policy actions, potentially resisting the urge by the members of the rate setting committee to make any adjustments to the current monetary policy. 

For instance, the October reading of the Purchasing Managers Index showed a significant expansion of both manufacturing and services activities while private sector credit growth eased substantially in response to the correction that took place in the market interest rates, though such credit is expanding at the authorities’ desired range.   

The bond yields which eased during the last couple of weeks after rising continuously since August also prompted the Monetary Board to hold steady this week. 

For instance, the yields of the treasury bill auction held this week fell for the third week in a row across all three maturities with the benchmark 1-year bill yield shedding a single basis point to end at 8.16 percent.

The officials at the Central Bank expect the yields to level off at these levels.  

Meanwhile, the other market rates, except for the prime lending rate and the deposit rates have refused to budge as the average weighted new lending rate which gauges the average rate of the loans disbursed in the most recent time period has in fact fallen by 24 basis points so far this year to 8.14 percent. 

The prime lending rate, the proxy for the short term lending rates rose the most by 222 basis points this year through November 23 to 8.03 percent as shown earlier this week. 
However, a potential fresh outbreak of the pandemic, fragile external sector and the inflation remain key hangovers which could change the trajectory and challenge the monetary policy status quo. 

While the Central Bank is hoping to expand the economy by 5.0 percent this year and are buoyed by the strengthening exports which recorded over a billion dollars in earnings in five consecutive months through October, the inflation is projected to accelerate further in the immediate future, the prices are expected to ease towards the near term with the unclogging of the global supply chains and the easing of demand conditions elsewhere with the fading impact of the stimulus measures. 

However, the Monetary Board admitted that they are seeing some, “gradual firming of aggregate demand conditions”, but the current price pressures which are mostly supply driven cannot be addressed through monetary policy. 

“A further acceleration of headline inflation is possible in the immediate future, although such movements are expected to be transitory”, the Monetary Board said in a statement.  
“The monetary policy measures already taken by the Central Bank will help curbing excessive demand pressures and preventing the buildup of adverse inflation expectations”, they added. 

Global central banks are increasingly turning hawkish with rate hikes and the most recent one was the 0.25 percent increase of its benchmark seven day repurchase rate by The Bank of Korea yesterday on rising inflation and household debt. 

The Bank of Korea became the first developed country in Asia to raise its benchmark rates by 50 basis points in August after 15 months at record low, scaling back its policy support to fend off surging household debt and to cool its red-hot property prices.

The US Fed, the de-facto global Central Bank which most other central banks look up to said just their monetary policy is most likely to raise interest rates by June or earlier, as their inflation hit a 30-year high of 6.2 percent in October, more than thrice their preferred inflation level of 2.0 percent.