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Global Monetary Policy Monitor

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Brazil and Indonesia are the exception

December 5, 2013

In November, 16 countries announced monetary policy decisions, six of them changing the monetary policy rate.

In November, 16 countries announced monetary policy decisions, six of them changing the monetary policy rate. The decoupling among emerging-market economies throughout the year continues. Brazil and Indonesia, which suffer higher inflation and depreciation, raised policy rates. Meanwhile, Chile, Peru, Hungary and Thailand, with lower inflation and more stable exchange rates, found additional room to ease their monetary policy conditions.


The Brazilian Central Bank’s Monetary Policy Committee (Copom) increased the monetary-policy rate (Selic) by 0.50 pp in November, to 10% per year, as had been widely expected. After four consecutive meetings followed by the same post-decision statement, the Copom modified the text so as to signal, in our view, the approaching end of the rate-hiking cycle. Moderate economic growth and lower inflation readings published recently may have weighed on the Copom’s decision.

There were two changes from the statements issued in previous meetings. First, the beginning of the cycle was mentioned tonight (“started in the April 2013 meeting”), which seems to be an evaluation that the hiking cycle is already longstanding. Second, the Copom withdrew the following sentence: “The Committee evaluates that this decision will contribute to set inflation into decline and ensure that this trend persists in the upcoming year.” In our view, by leaving out this sentence, the Copom may be suggesting that the goal of curbing inflation is largely ensured by monetary tightening that has already been implemented.

This signal that the hiking cycle is close to an end, reinforced by the minutes of the Copom meeting published one week later, was in line with our scenario. We maintain our forecast of an additional 0.25-pp hike in the Selic rate in January, to 10.25%, a level likely to be maintained until at least the end of 2014.


According to the minutes of the latest monetary policy meeting, the decision to lower the interest rate by 25 bps (to 3.5%) was unanimous. This is in contrast to the previous decision, when the central bank reduced the policy rate by 25 bps, but two board members voted to keep it unchanged. There was also an unanimous agreement within the board that additional rate cuts would not be advisable in the foreseeable future, and that the central bank should communicate this message to the market.

In the minutes, board members continued to be very concerned with economic growth and sounded comfortable with the inflation outlook. They see decreased (but still-high) downside risks for the economy relative to the previous meeting. Still, the board doesn’t think that there is room for additional rate cuts. First, because it expects a narrower (though still wide) output gap ahead. Second, the real interest rate is already too low (specifically, the central bank cites the short-term ex ante real rate, which is close to zero) and a new rate cut could generate risks to financial stability. Finally, the higher public deficit announced for 2014 is also weighing on monetary policy guidance. However, this is not because of the positive impact of public spending on growth or because of the transitory impact of tax hikes on inflation. It is because there is the risk that the government will fail to bring the public deficit (excluding PEMEX investments) back down to zero over the next few years. In fact, one board member referred to the potential negative impact of the higher public deficit announced for 2014 on expectations. In the concluding remarks of the most recent inflation report, the central bank again highlighted the importance of solid public finances by pointing out that besides a successful reform agenda, strengthening Mexico’s fiscal accounts is key to supporting growth in the medium term.

We don’t expect any policy rate moves soon. In our scenario, the central bank will remain on hold throughout 2014, so the policy rate would likely end both 2013 and 2014 at 3.5%.  


The central bank lowered the monetary policy rate by 25 bps for the second consecutive month in November. The policy rate is now at 4.5%. Although this decision was in line with our estimate, we note that many market participants were expecting the central bank to deliver the next interest rate cut only in December (according to Bloomberg consensus, analysts expected a 25-bp cut in November, while analysts surveyed by the central bank expected the second cut only in December).

More recently, the central bank starts to limit the expectation of further interest rate cuts. In a recent interview with a local newspaper, the governor of the central bank (Rodrigo Vergara) said that the current stance of the monetary policy is now “neutral”. In the most recent monetary policy report, published after this interview, the central bank assumes that in its baseline scenario the interest rate follows a path similar to the one expected by analysts in its survey, which implies that the easing cycle would end when the interest rate reaches 4.25%. We continue to expect the central bank to maintain the interest rate in December before resuming the easing cycle. In our scenario, growth and inflation allow for two 25-bp rate cuts during 1Q14.


The Central Bank reduced the policy rate by 25 bps (to 4.0%) in November. This was the first rate move since May 2011. In the press statement, the board mentioned the below-trend economic growth in Peru, lower dynamism in the global economy, declining inflation expectations and the reversal of supply factors that affected domestic prices. The board also said that many current and leading activity indicators have weakened. Finally, the statement cited that this decision was “preemptive” and does not necessarily imply a sequence of interest rate reductions.

The rate cut took markets by surprise. Until the November’s decision, the central bank was addressing the economic slowdown through lower reserve requirements. Because Peru’s economy is still partially dollarized, the central bank was hinting that it wasn’t willing to add exchange-rate depreciation pressures by reducing the interest-rate differential.

After the decision, Governor Velarde stated that slight reductions in the interest rate and in reserve requirements are possible. In fact, a few days later the central bank announced that it was lowering reserve requirements in local currency again. Meanwhile, the central bank is trying to contain the depreciation of the sol through heavy interventions in the spot market.  

Although we do not expect a rate cut in December, we think that the below trend economic growth will lead the central bank to reduce the policy rate by 50 bps early next year. So we see the policy rate ending 2014 at 3.5%.


The Central Bank left the rate unchanged at 3.25% in November, in line with both our estimate and market consensus.  In the press statement, board members mentioned the recent improvements in consumer and business confidence and stronger consumption of durable goods. They cited that the fall in the annual inflation in October was temporary, due to lower food prices. As in the previous month, the central bank reiterated that the current monetary conditions are expansionary. In this context, the bank reaffirmed their 2013 GDP forecast of 3.5% - 4.5%, and the 3Q13 forecast range from 3.8% to 5.4%. However, it removed the downward risk in economic growth that it cited in the previous meeting (even though it maintained the neutral bias in the press release).

We still expect lower rates in the future. In our view, the recovery in Colombia’s activity saw in the 2Q13 will be short lived. However, we now expect the central bank to reduce the interest rate only in the 1H14, so the policy rate would end this year at 3.25% and 2014 at 3.0%.

See below a summary of the latest monetary policy decisions and the calendar for the next decisions scheduled in December.

1. 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. Calendar of monetary policy decisions in December


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