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Second Quarter Review of Monetary Policy click here

Second Quarter Review of Monetary Policy 2009-2010
-Announced on the 27th October 2009

Part A. Monetary Policy

I. Macroeconomic and Monetary Developments

Global Outlook

Real GDP

8. Global economic performance improved during the second quarter of 2009 prompting the IMF to reduce the projected rate of economic contraction in 2009 from 1.4 per cent made in July 2009 to 1.1 per cent in its latest World Economic Outlook (WEO) released in early October 2009. The IMF has also revised upwards the projection of global growth for 2010 to 3.1 per cent against the earlier projection of 2.5 per cent in its July Update.

9. In the US, the macroeconomic signals are mixed. Real GDP in Q2 of 2009 contracted by 0.7 per cent, a significant improvement over the contraction of 6.4 per cent in Q1 of 2009, largely due to positive contribution from government spending. Home prices have shown signs of stabilisation. On the negative side, the unemployment rate rose to 9.8 per cent in September 2009 and is expected to rise further. Consumer sentiment dipped on apprehensions about the economy, job and income prospects.

10. Economic indicators in the euro area continue to be weak. Real GDP contracted by 4.9 per cent in Q1 and by 4.8 per cent in Q2 of 2009. Unemployment rose to 9.6 per cent in August 2009 and retail sales dipped further. Although consumer and business confidence improved in Q3 of 2009, these are yet to move into positive territory. Real GDP in the UK contracted by 5.5 per cent in Q2 of 2009 and by 5.2 per cent in Q3 of 2009. Unemployment in the UK rose to 7.9 per cent in July-August 2009. Real GDP in Japan expanded by 2.3 per cent in Q2 2009 after negative growth for almost a year. Though output is stabilising and consumer and business confidence are improving, industrial outlook remains uncertain with big companies planning to cut capital outlays. Overall, OECD’s Composite Leading Indicators for August 2009 show signs of recovery in most of the economies, especially in France and Italy.


11. Global commodity prices have rebounded ahead of global recovery. The Food and Agriculture Organisation (FAO) Food Price Index rose in August-September 2009. Along with volatile food prices, industrial metal and gold prices have firmed up in Q3 of 2009. Gold prices have reached record levels on account of significant weakening of the US dollar during the quarter. Crude oil prices have been steady with a firm undertone during the quarter reflecting the balance of expectations of an economic recovery and higher oil consumption in the future against weak current demand and high inventories. Despite these trends, consumer price inflation in most developed and emerging market economies (other than India) remains negative/low due mostly to large output gaps. The WEO of October 2009 projects consumer price inflation in advanced countries to remain low, rising from 0.1 per cent in 2009 to 1.1 per cent in 2010. Consumer price inflation in emerging and developing economies is projected to decline from 5.5 per cent in 2009 to 4.9 per cent in 2010. In sharp contrast, in India, CPI inflation has not only remained elevated, but has indeed hardened in recent months reflecting higher food prices.

Financial Markets

12. The wide array of supportive central bank actions and pronouncements have aided in the easing of money markets and the narrowing of corporate bond spreads. Share prices have rebounded in all major markets. Most major banks in the US and Europe have reported profits recently after the large losses incurred during 2008. On the negative side, credit offtake has fallen in 2009 in a number of advanced economies as corporates reduced debt levels in an environment of tighter credit standards by lenders. There are concerns, as highlighted by the Global Financial Stability Report (GFSR) of the IMF, that the transfer of financial risks to fiscal authorities could crowd out the private sector and undermine the sustainability of public sector finances.

Monetary Policy Measures

13. Central banks in all the major developed economies, barring Australia, continued with easy monetary policy and have held policy rates steady in recent months. They have also continued with measures to provide liquidity and other support to alleviate stress in the financial markets following the crisis. In the current cycle, the Reserve Bank of Australia has been the first G-20 central bank to raise its policy rate (Cash Rate) by 25 basis points to 3.25 per cent on October 6 on the back of diminished risk of serious economic contraction. The Reserve Bank of New Zealand has withdrawn some temporary emergency liquidity facilities put in place during the financial crisis of 2008.

Emerging Market Economies

14. In its October WEO, the IMF projects the real GDP growth of emerging and developing economies to decelerate to 1.7 per cent in 2009 (1.5 per cent projected in the July Update) from 6.0 per cent in 2008, before rebounding to 5.1 per cent in 2010. The IMF does not expect the rebound to be evenly spread across the EMEs; there will be a divergence between Asian and non-Asian EMEs as the rebound would be driven by China, India and other emerging Asian economies. Emerging markets that had little direct exposure to the financial meltdown have displayed significant economic momentum in Q3 of 2009, albeit slower than the rapid pace of Q2. China’s export volumes have been growing, including recently to the US and Europe, leading to improvement in China’s trade surplus. Growth in industrial production and fixed asset investment in China is estimated to have improved and its longer-term prospects have remained strong. In contrast, Latin America, Eastern Europe and Commonwealth of Independent States (CIS) are all expected to face contraction in 2009 and sluggish growth in 2010, while the Middle East is projected to grow moderately.


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