Itaú BBA - Additional Stimulus

Global Monetary Policy Monitor

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Additional Stimulus

April 5, 2016

The expansionary bias in global monetary policy continues. This environment has benefitted Latin America.

In March, 21 of the 31 countries we monitor made monetary policy decisions. The expansionary bias in global monetary policy continues, as six central banks – Eurozone, Norway, New Zealand, Hungary, Taiwan and Indonesia – cut its interest rates. The Fed signal that it will hike twice the Fed Funds rates this year, instead of four times signaled previously. On the contractionary side, only Colombia and South Africa hiked its interest rates. 

This expansionary environment has improved global financial conditions and raised commodity prices, benefitting Latin America. Low growth and less pressure on the exchange-rate market have made room for lower interest rate paths in the region.  We are not forecasting interest rate hikes in Chile and Mexico for this year, and we expect Brazil to start cutting rates from July. In Peru, we only expect to see one further rate increase. The sole exception is Colombia, where the outlook for inflation remains challenging, so we expect additional rate hikes.


1. Policy rates: Historical table

*Blank places mean absence of monetary policy decision for the month.

** Numbers in red indicate rate cuts, in green rate hikes and in grey another monetary policy change different from interest rates.


2. Charts


3. Monetary policy in LatAm

BRAZIL – Inflation slows, and interest rate cuts are likely to come sooner

The BCB’s Monetary Policy Committee (Copom) mantained the benchmark Selic rate at 14.25% in its March meeting.

The scenario is getting less complex. For a long time, the monetary policy scenario was ambiguous, with inflation under pressure and the economy in recession. However, inflation has finally started to recede, making the scenario less complex.

Given the risks, it is still too soon to cut interest rates. In its 1Q16 Inflation Report, the Central Bank stated that there are still uncertainties around the balance of risks for inflation, and emphasized its view that current conditions “do not allow the Committee to work with the possibility of monetary flexibilization”.

Interest rates are likely to fall in the second half of the year. The downward trend in inflation and the likelihood of a prolonged recession were already featured in our baseline scenario, supporting our belief that interest rate cuts will come in the second half of this year.

Easing cycle could come sooner than expected. The downward trend in inflation has started to consolidate. Additionally, a stronger Brazilian real creates space for a more benign IPCA trajectory. Thus, we believe the central bank will start an easing cycle in July, rather than in August, as we expected last month.

We forecast that the Selic benchmark rate will be lowered to 12.25% by the end of this year, through four 0.50-pp cuts starting in July. The easing cycle is likely to continue in 2017, with the Selic rate reaching 10.00%.

CHILE – Loosening the monetary policy stance

In March, the central bank of Chile left the policy rate unchanged at 3.50% and retained a tightening bias. The monetary authority has been on hold for a full quarter, following what has so far been a short and discontinuous tightening cycle that started in 4Q15.

In the 1Q16 Monetary Policy Report (IPoM), published after the March meeting, the central bank signaled less monetary tightening on the policy horizon relative to the previous report. The guidance is now that only one additional 25-basis-point hike would occur this year (previously, up to two hikes were in the cards), with one additional rate hike between one and two years (previously, the rate was expected to be between 4.0% and 4.25%). A flatter trajectory for the policy rate comes amid lower growth expectations. The central bank now sees a 1.25%-2.25% growth rate this year, from 2%-3% in the December report. As a result, the central bank lowered its inflation forecast for 2016 from 3.8% in December, to 3.6% in the current report.

We do not expect further rate hikes this year or in 2017. In our view, the central bank will continue to gradually abandon its monetary-tightening bias amid weak growth and falling inflation.

COLOMBIA – The hiking cycle continues

For a seventh consecutive month, the central bank of Colombia increased its policy rate in March (by 25 bps), to 6.50%. In the current tightening cycle, the policy rate has increased 200 basis points. Once again, the decision was split, with some members voting for a 50-basis point hike, as in previous months. According to the minutes of the meeting, the board members voting for a 50-bp increase are concerned with a permanent damage to the central bank's credibility after a prolonged period of elevated inflation. Besides the high levels of inflation and inflation expectations, the board is concerned with the wide current-account deficit.

As there is no indication that the board is about to end the tightening cycle and inflation convergence to the target is still uncertain, we expect further tightening ahead. We expect two more 25-basis point hikes, taking the policy rate to 7% in May. In 2017, as inflation cools off, we expect the policy rate back at 6.0%.

PERU – A temporary pause

The central bank of Peru left its policy rate unchanged at 4.25% in March, after three consecutive rate hikes, but retained a tightening bias. So far, the current tightening cycle totals 100 basis points.

As a result of lower-than-expected inflation and less pressure on the exchange-rate market , we expect only one additional 25-bp rate hike this year, taking the policy rate to 4.5%. The timing of the next rate move will depend mostly on the evolution of inflation and inflation expectations. In 2017, as inflation reenters the target range, we see the policy rate being lowered to 4.25%.

MEXICO – No further hikes this year

Mexico’s central bank left the policy rate unchanged in March. The move was widely expected, given that the board explicitly said the hike in the extraordinary meeting held in February was not the beginning of a cycle and the Mexican peso – the variable responsible for the hike - reversed its weakening trend.

Still, the board continues to highlight the evolution of the exchange rate as the main variable that it will monitor in the upcoming decisions. The interest-rate differential and the evolution of the output gap are also listed as variables that the board will watch closely.

Considering our expectation of a stable exchange rate ahead, we do not expect further rate hikes this year, even though we see two rate hikes in the U.S. In our view, the Fed is unlikely to raise rates if it perceives that international markets would not react in an orderly fashion. Also, the focus of Mexico’s central bank on the exchange rate means that the board would not react automatically to higher interest rates in the U.S.


4. Calendar of monetary policy decisions in April


** Decision already made.



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