Monetary Policy Report - July de 2021

Macroeconomic summary The Colombian economy sustained numerous shocks in the second quarter, pri¬marily related to costs and supply. The majority of these shocks were unantic¬ipated or proved more persistent than expected, interrupting the recovery in economic activity observed at the beginning of the year and pushing overall inflation above the target. Core inflation (excluding food and regulated items) increased but remained low, in line with the technical staff’s expectations. A third wave of the pandemic, which became more severe and prolonged than the previous outbreak, began in early April. This had both a high cost in terms of human life and a negative impact on Colombia's economic recovery. Between May and mid-June roadblocks and other disruptions to public order had a sig¬nificant negative effect on economic activity and inflation. The combination and magnitude of these two shocks likely led to a decline in gross domestic product (GDP) compared to the first quarter. Roadblocks also led to a significant in¬crease in food prices. The accumulated effects of global disruptions to certain value chains and increased international freight transportation prices, which since the end of 2020 have restricted supply and increased costs, also affected Colombia’s economy. The factors described above, which primarily affected the consumer price index (CPI) for goods and foods, explain to a significant degree the technical staff’s forecast errors and the increase in overall inflation above the 3% target. By contrast, increases in core inflation and in prices for regulated items were in line with the technical staff’s expectations, and can be explained largely by the elimination of various price relief measures put in place last year. An increase in perceived sovereign risk and the upward pressures that this im¬plies on international financing costs and the exchange rate were further con¬siderations. Despite significant negative shocks, economic growth in the first half of the year (9.1%) is now expected to be significantly higher than projected in the April re¬port (7.1%), a sign of a more dynamic economy that could recover more quickly than previously forecast. Diverse economic activity figures have indicated high¬er-than-expected growth since the end of 2020. This suggests that the negative effects on output from recurring waves of COVID-19 have grown weaker and less long-lasting with subsequent outbreaks. Nevertheless, the third wave of the coro¬navirus, and to an even greater degree the previously mentioned roadblocks and disruptions to public order, likely led to a decline in GDP in the second quar¬ter compared to the first. Despite this, data from the monthly economic tracking indicator (ISE) for April and May surpassed expectations, and new sector-level measures of economic activity suggest that the negative impact of the pandemic on output continues to moderate, amid reduced restrictions on mobility and im¬provements in the pace of vaccination programs. Freight transportation registers (June) and unregulated energy demand (July), among other indicators, suggest a significant recovery following the roadblocks in May. Given the above, annual GDP growth in the second quarter is expected to have been around 17.3% (previously 15.8%), explained in large part by a low basis of comparison. The technical staff revised its growth projection for 2021 upward from 6% to 7.5%. This forecast, which comes with an unusually high degree of uncertain¬ty, assumes no additional disruptions to public order and that any new waves of COVID-19 will not have significant additional negative effects on economic activity. Recovery in international demand, price levels for some of Colombia’s export com¬modities, and remittances from workers abroad have all performed better than projected in the previous report. This dynamic is expected to continue to drive recovery in the national income over the rest of the year. Continued ample international liquidity, an acceleration in vacci¬nation programs, and low interest rates can also be ex¬pected to favor economic activity. Improved performance in the second quarter, which led to an upward growth revision for all components of spending, is expected to continue, with the economy returning to 2019 production levels at the end of 2021, earlier than estimated in the April report. This forecast continues to account for the short-term effects on aggregate demand of a tax reform package along the lines of what is currently being pro-posed by the national government. Given the above, the central forecast scenario in this report projects growth in 2021 of 7.5% and in 2022 of 3.1% (Graph 1.1). In this scenar¬io, economic activity would nonetheless remain below potential. The noted improvement in these projections comes with a high degree of uncertainty. Annual inflation increased more than expected in June (3.63%) as a result of changes in food prices, while growth in core inflation (1.87%) was similar to projections.

International Liquidity Channel and Performance of Commercial Banks in Nigeria

This study examined the effect of international liquidity channels on the profitability of quoted commercial banks in Nigeria. The objective was to examine the direction which international liquidity channel affects commercial banks profitability. Return on equity was used as dependent variable while Monetary policy channels proxy by percentage of net foreign assets, financial market channel proxy by percentage of net foreign portfolio investment, international trade channel proxy by percentage of Nigeria terms of trade, capital mobility channel proxy by net foreign direct investment and currency channel proxy by variation of Nigeria naira to US dollar. Panel data of return on equity were sourced from financial reports of the commercial banks while international liquidity variables were sourced from Central banks of Nigeria statistical bulletin. Ordinary least square methods were used as data analysis methods. The study found that 50.3 percent of the variation in return on equity of the commercial banks is explained by the variables in the equation. Monetary policy channel, international trade channel and currency have negative effect on return on equity while financial market channel and capital mobility channel has positive and no significant effect on return on equity of the commercial banks. The study recommends that Central Bank of Nigeria should adopt an appropriate macro prudential framework to enable Nigeria banks become internationally active in terms of liquidity and solvency. The depreciating naira exchange rate should be integrated to the monetary and the macroeconomic policies to avert its negative effect on the economy and the banking industry. The regulatory authorities and the bank management should formulate policies to manage international monetary shocks, the international financial environment and global financial crises to enhance Nigerian banking system soundness.

Determinants of Spot and Forward Interest Rates in Brazil in an International Liquidity Scenario: An Econometric Analysis for the Period 2007-2019

Over the last 25 years, Brazil has been among the countries with the highest interest rates globally. High interest rates have been necessary during several recent times, such as in the period from 1997 to 1999, due to the repeated international financial crises that have plagued the country. From 1999, a sustained path of interest rate reduction begun. With the outbreak of the 2008 international financial crisis, the Brazilian monetary authorities promoted a new round of falling domestic interest rates in response to the recessive effects and the threat of a systemic crisis that could hang over the national financial system. In 2012, a set of interventionist nature policies led to a decrease in the Selic rate. Thus, looking at the last 25 years, it appears that many factors have started to influence the trajectory of Brazilian interest rates. In this context, the present work aims to identify, based on empirical research, the determinants of spot and future interest rates. As a methodology, the research uses a multivariate econometric vector autoregressive model (VAR) with error correction (VEC). The analysis covers the years 2017 to 2019, corresponding to the period in the aftermath of the global financial crisis of 2008. The results evidence that both the spot rate and the DI future can be determined by the fluctuations in the level of inflation and by the level of activity and the real exchange rate, in addition to the effects of the lagged variables themselves.

Ethiopia’s debt plans may spare private creditors

Significance The announcement provoked panic among some bondholders but their concerns appear unfounded given Ethiopia's overall debt sustainability and the government's ability to engage with Chinese lenders on favourable terms. Impacts Other African governments will follow Ethiopia's progress before requesting debt restructuring. Ratings agencies may need to tweak their methodologies to account for such relief, lest they needlessly downgrade proactive sovereigns. Pressure on Chinese lenders may rekindle Beijing's calls for the IMF to issue new Special Drawing Rights to boost international liquidity.

Robert Triffin

This book provides an intellectual biography of Robert Triffin. Triffin (1911–1993) played a key role in the international monetary debates in the postwar period. He became famous with trenchant analyses of the vulnerabilities of the international monetary system that was dependent on a national currency for its international liquidity (the Triffin dilemma), predicting the end of the Bretton Woods system. Triffin was a child of the interwar period, marked by the Great Depression and the rise of fascism. He became not only an eminent academic but also an influential policy adviser. In the mid-1940s he worked at the Federal Reserve, participating in several monetary reform missions in Latin America. Thereafter, Triffin played an important role in the creation of the European Payments Union. In his later academic life, Triffin put forward proposals for reforming the international monetary system. But because he doubted that they would come to fruition, he also developed plans for regional monetary integration, particularly in Europe, where he became the monetary adviser of Jean Monnet. With proposals for a European Reserve Fund and a European currency unit, he became one of the intellectual fathers of Europe’s monetary union. Throughout his life Triffin remained faithful to the ideals of his youth. The young Triffin was indignant about the Versailles Treaty, while the old Triffin fulminated against the Vietnam War. For him, economics was a way to contribute to a better world. He was strongly attached to his independence and the pursuit of a better and more peaceful world. He was a monk in economist’s clothing.

FINANCIAL MARKET STABILITY – KEY LEVER ECONOMIC DEVELOPMENT OF THE STATE

Economic issues of the state's development at the present stage, largely depend on the development of the financial sphere. That is dictated by the reduction of the role of the real sector in the economy of the development of the state. Based on the experience of developed countries, we can state that the functioning of the effective banking system is the lever of development of the country's economy. The modern Ukrainian economy still cannot demonstrate the adequacy of the development of the financial market. The banking sector is most effective in this area. The issue of regulating the adequacy of bank capital is also relevant for the Ukrainian economy. The solution of this issue, to a certain extent, is embedded in the process of Ukraine's implementation of international standards for regulating the activities of banks. In this direction, the NBU has developed a program of measures to update regulatory requirements for banks. The paper argues the feasibility of a bank-centric financial market model for Ukraine. An analysis of the dynamics of the formation of bank capital has been carried out. The indicators of its sufficiency are considered separately. The results of the analysis of the compliance of Ukrainian banks with international liquidity standards are presented. Analysis of banks' capital security, dynamics of its absolute values with the rate of formation of gross domestic product was carried out. The bank's capital adequacy indicators are used as criteria for assessing their stability. The methodology used to assess the relationship between banks' equity and gross domestic product through sensitivity ratio (β). The level of communication between the indicators was determined by the value of the correlation ratio. Separately, an analysis of the impact of banks' equity on the level of gross domestic product for individual periods was carried out. The purpose of this analysis is to find out the peculiarities of banks' activities. As a result, it was proved that there is a connection between the indicator of the level of banks' equity capital and the gross domestic product. Additionally, the article describes the problems that hinder the development of the financial market in Ukraine. Government support for the banking sector is the basis for its development.