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Global Monetary Policy Monitor

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B hikes, RICs cut

July 2, 2015

In June, we have again observed an increase in the number of central banks adding monetary stimulus.

In June, there were monetary policy decisions in 24 of the 31 countries and regions (including the eurozone and the UK) we follow. Seven central banks cut interest rates, with China and New Zealand surprising markets. Once again, only Brazil hiked rates. With the June actions, we have again observed an increase in the number of central banks adding monetary stimulus, including the other BRIC economies: China, India and Russia.

With the exception of Brazil, which will probably hike interest rates further in July, our expectation is for steady rates in the rest of Latin America. Central banks in Mexico and Chile are discussing the possibility of raising interest rates, but economic data in the two countries is reducing the probability of a move in the short term. Thus, we do not expect rate hikes in Chile either this year or next, and we expect hikes in Mexico only in 1Q16.

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: Mission almost, but not yet, accomplished

In June, the Brazilian Central Bank’s Monetary Policy Committee (Copom) once again raised the benchmark Selic interest rate by 50 bps, to 13.75%. The decision was unanimous and in line with expectations.

In the minutes of the meeting and in the 2Q Inflation Report (IR), the Copom signaled that the tightening cycle will continue ahead. The Copom repeated that "the scenario of convergence of inflation to 4.5% in 2016 has strengthened," but that advances "are still not sufficient."

However, the Copom stated in the IR that the effects of the current monetary policy strategy have already started to be observed. The committee points out that "inflation expectations are near or at the 4.5% midpoint target in the medium and in the long run". However, "inflation expectations for the end of 2016 still show relevant differences in relation to target."

We expect the Copom will deliver a final hike of 0.5 pp in July, and keep the Selic rate at 14.25% until the second quarter of 2016. Indeed, we believe that an additional hike of 0.5%, with some marginal revaluation of the economic activity scenario by the Copom, would be sufficient to bring inflation down to levels close to the target by the end of 2016, according to Copom's model.

MEXICO: No rate hikes this year

Mexico’s central bank maintained its policy rate at 3% in June, as both we and the market consensus expected. In the press statement announcing the decision, the board highlighted the fragility of Mexico’s economic recovery and noted that inflation remains under control. The board members (or at least most of them) concluded that the balance of risks to both activity and inflation had not changed since their previous meeting. Even so, the board continued to make clear that monetary policy in the U.S. will be a key variable in future decisions by Mexico’s central bank. 

However, given the weak economic activity in Mexico, well-behaved inflation (in spite of the weakening of the MXN) and the fact that the exchange-rate market has been “digesting” the Fed’s (likely) liftoff smoothly, we believe that the central bank will start its tightening cycle in 1Q16, months after the Fed does (we expect the Fed to raise rates in September).

CHILE: No rate hikes in sight

The Central Bank of Chile unanimously decided to leave its policy rate unchanged at 3.0%. This was widely expected and is the eighth consecutive meeting in which the policy rate has been left unchanged. The board considered holding the policy rate to be the only relevant option. Although high, inflation is still expected to gradually decelerate toward the target (a view supported by the latest CPI and wage numbers), while weak activity meant the monetary stimulus should be maintained for a prolonged period. 

According to the minutes, the latest domestic information is in line with the June Monetary Policy Report, with inflation coming in as expected in May and expected to remain elevated for some months. Attention was drawn to the recent economic activity data, with some board members commenting that it was weaker than previously expected and showing no significant pick-up. The central bank noted that the labor market has shown low employment and labor-force growth rates alongside lower wage growth.

Given that we expect output to only gradually recover (2.5% this year from 1.9% in 2014) and for inflation to fall gradually towards 3.0% (3.3% year-end), we differ with the central bank’s guidance, and see no rate moves this year or in 2016. The central bank is signaling that hikes would start in the first half of 2016. However, we acknowledge that if high inflation proves to be more persistent than expected, rate hikes are likely and could come even sooner than the central bank is currently signaling (first half 2016).

COLOMBIA: Stable rates amid a slowing economy and high inflation

The central bank of Colombia held its policy rate unchanged in its June meeting, at 4.5% for the tenth consecutive month. The decision was unanimous and widely expected by the market. The press release announcing the decision kept a neutral tone, as has been the case in recent meetings.

Regarding domestic activity, the board considers that the 1Q15 growth rate, which showed the economy slowing after a dynamic 2014, was in line with the staff estimate. Moreover, data available for 2Q15 suggests the “adjustment to the new external conditions” continues. In this context, household consumption could see additional moderation. This is expected to occur in spite of real interest rates that remain expansive and a relatively solid labor market. Turning to inflation, the board noted that the deceleration observed in May was due to lower dynamism in food prices, and that tradable and non-tradable prices (excluding food and regulated prices) kept rising. In fact, the average of core inflation measures has increased for eight consecutive months, reaching 3.99% in May. On the other hand, inflation expectations derived from asset prices and surveys (for the relevant policy horizon) remain in the 3%-3.5% range, broadly anchored in the board’s opinion.

We expect the central bank to remain on hold for the remainder of this year and the next. As the economy grows below potential and transitory effects impacting consumer prices subside, inflation will likely converge to the center of the target by the end of next year, making it unnecessary for the bank to raise rates. On the other hand, as the current-account deficit remains wide and the Federal Reserve Board is set to increase its interest rates in late 2015, there is little room for additional easing.

PERU: No space to reduce the policy rate

Peru’s central bank held the policy rate at 3.25%, as expected, in its June meeting. It is the fifth consecutive meeting at which the board has stayed on hold. The board retained a neutral tone. The current interest-rate level was deemed compatible with the expectation that inflation would converge to the 2.0% target in the 2015-2016 horizon. The board indicated that it would monitor inflation expectations and its determinants in order to, if necessary, make adjustments to its monetary policy instruments. The decision considered the views that projected GDP growth remained below potential; inflation expectations are still anchored within the target range; signals of a global economic recovery are mixed, so there has been high financial and foreign-exchange market volatility; and finally, that inflation has been affected by temporary supply-side shocks that should revert but at a slower pace than initially anticipated.

However, the central bank continues to implement monetary easing through lowering the reserve-requirement rate for local currency (to 6.5% from 7.0%, effective from the start of June). This is a continued attempt to increase liquidity and support credit growth, as the economy has yet to rebound from a slowdown last year, without adding pressures for exchange-rate weakening. However, reserve-requirement rate cuts are less effective now that its level is already low. Having said that, while we do not expect any policy-rate moves during the remainder of the year, or throughout next year, it is possible that the central bank reduces the reserve requirement rate further.

4. Calendar of monetary policy decisions in July

 * Source: Bloomberg



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