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Global Monetary Policy Monitor

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Brazil Interrupts Tightening Cycle; Surprising Rate Cut in Turkey

June 3, 2014

In May, monetary policy decisions were made in 18 countries we cover.

In May, monetary policy decisions were made in 18 countries we cover. Colombia was the only one to increase its benchmark interest rate, extending the tightening cycle started in the previous month. Two countries reduced their benchmark rates: Hungary, continuing the rate-cut process of the recent months, and Turkey, in a decision that surprised market participants. Brazil also took the spotlight by interrupting a tightening cycle that lasted more than one year – started in April 2013 – and increased the Selic rate by 375 bps, to 11% p.a. The decision was expected by most market participants.

Improved international liquidity in recent months, which led the U.S. dollar to weaken against most currencies, has been an important driver for monetary policy decisions in many countries. The decisions by Turkey to cut rates and the interruption of the tightening cycle in Brazil were probably influenced by a more favorable environment for emerging market assets.

1. Policy rates: Historical table

2. Charts

3. Monetary policy in LatAm

Brazil: End of the Tightening Cycle, at the moment

The Brazilian Central Bank’s Monetary Policy Committee (Copom) maintained the benchmark Selic interest rate at 11.00% p.a. in its April meeting. The decision was unanimous, and in line with our expectation and with most market estimates.

The post-meeting statement included the expression “at the moment”, which, in our view, leaves the door open for new interest rates increases in the future: “In evaluating the macroeconomic scenario and inflation prospects, the Copom decided unanimously, at the moment, to maintain the Selic rate at 11.00% p.a., without bias.”.

In our view, the outlook for weaker economic activity (particularly the downward trend in business and consumer confidence levels, as well as the drop in automobile and supermarket sales) was behind the committee’s decision to interrupt the interest-rate hiking cycle. Exchange-rate appreciation in recent months, fueled by better global liquidity, and signs that inflation is no longer increasing (although it still remains at high levels) probably contributed to the decision as well.

Going forward, the Copom will likely wait to assess the effects of the monetary adjustments implemented so far - a 375 bp-increase in the Selic since April 2013. Next Thursday (June 5O), the Copom will release the minutes of this meeting, which are likely to provide additional information about the Copom’s view on the balance of risks to the inflation scenario.If that is required, we believe the Copom may implement additional interest rates increases to ensure a stable inflation outlook. In our view, that is going to happen only in the beginning of the next year.

We thus maintain our forecast, held since last February, that the Selic rate will remain at 11% p.a. until year-end, and will be lifted again in 2015, until 12.50% p.a.

Mexico: Central Bank Reduces Its Growth Forecast for 2014

Mexico’s central bank didn’t hold a monetary policy decision in May. The highlight of the month was, instead, the 1Q14 inflation report. The central bank reduced its growth forecast for this year (2.3%-3.3% this year, down from the 3.0%-4.0% in the previous report), but it maintained the forecast range for 2015 unchanged (3.2% - 4.2%). In addition, the inflation forecasts were also left unchanged from the previous report. The tone regarding potential policy rate moves is similar to the minutes and the statement of the latest monetary policy meeting. Although the central bank is concerned about the evolution of the economy, it sees signs of improvement in many activity indicators. The board continues to be upbeat on the declining path of inflation, saying it shows that there have been no second-round effects from the tax hikes introduced earlier this year. In its concluding remarks, the central bank repeats that it will pay special attention to the evolution of the output gap, on one hand, but also to the relative policy stance of Mexico vis-à-vis the U.S., suggesting a neutral bias.

We expect the Central Bank to maintain the policy rate at 3.50% throughout this year and to start a tightening cycle in 2015. However, considering the disappointing 1Q14 GDP number (which was released after the monetary policy report), the decline of inflation and the looser financial external conditions, the odds of rate cuts this year are higher than those of a hike.

Chile: Greater Concerns Over Inflation

As expected by us and most market participants, Chile’s central bank left its policy rate unchanged at 4.0%, for the second consecutive month in May. It is important to note that we and the market were expecting the central bank to resume the easing cycle in the latest meeting up until April’s CPI was released, which came in much higher than expectations. Importantly, the board maintained the easing bias in the press statement announcing the decision, saying that it “will evaluate the possibility of introducing additional policy rate cuts according to the evolution of the internal and external macroeconomic conditions”. However, the central bank also made it clear in the statement that it is vigilant on the recent inflation spike, hinting that additional cuts might take a while.   

The minutes of the meeting indicated that additional cuts are dependent on inflation data. Board members sounded concerned not only with the level of inflation, but how broad-based it is. On activity, the board saw (at least until the latest decision) a slowdown in line with the forecasts of the most recent monetary policy report, highlighting that the concerns over inflation are greater than those over economic growth. Although the economy is growing below potential, board members acknowledged that the size of the output gap is uncertain, especially considering that the unemployment rate continues at a very low level.

As Chile’s economy continues to be sluggish, we expect the central bank to further ease the policy rate ahead. Therefore, we continue to expect the interest rate to end this year at 3.5%. However, considering the recent inflation dynamics, we don’t expect rate cuts soon. In our view, the central bank will resume the easing cycle once the data indicates that the inflation outlook for the relevant horizon is not at risk.  

Peru: Unchanged Rates and Reserve Requirements

The Peruvian Central Bank left the interest rate unchanged, as expected, at 4.0%. The press statement said that the decision to maintain the rate was consistent with an inflation forecast of 2.0% within the next two years, as inflation expectations remain in the target range and supply-side pressures continue to moderate. In this scenario, the central bank expects inflation to remain near the upper limit of the target band, thereafter converging to the 2.0% target. The board also considered the current below potential growth and the mixed signals of a global recovery in its decision, adding that the current indicators point to a dynamic economy, albeit at a lower than expected rate. Finally, the board repeated what it said in April's statement in terms of tracking inflation's evolution with respect to additional monetary policy moves.

In addition, reserve requirements for June will be left unchanged, for the second consecutive month. Finally, as the Peruvian sol appreciated, the central bank bought dollars in the spot market for the first time in 13 months.

We don´t expect the central bank to alter the interest in our forecast horizon (end of 2015).

Colombia: The Tightening Cycle Continues

In a unanimous decision, Colombia's central bank raised the policy rate by 25 bps to 3.75%. This was the second consecutive 25-bp rate hike and, unlike last month, it was expected by us and by most market participants.

The press statement was very similar to the previous one, as the board once again emphasized that a gradual increase of the monetary policy rate now, prevents the need for a sharper interest rate adjustment in the future. The board also highlighted that inflation continued to edge up, towards the target center, while inflation expectations increased slightly from last month, when they had hovered around the target center (3%). The central bank expects the output gap to close this year and it mentioned that the seasonally-adjusted unemployment rate continues its downward trend.

For the next monetary policy meeting, we expect a pause in the hiking cycle, as the central bank is making it clear that it will follow a “gradual approach” for removing monetary stimulus. However, next month we expect the central bank to announce a renewal of its dollar purchase program (which expires in June), possibly increasing the size of the potential purchases (for the 2Q14 purchases were capped at USD 1.0 billion). In fact, the rhetoric against exchange-rate appreciation has been strong. Finance Minister Mauricio Cardenas spoke to reporters after the decision announcement and indicated that the Ministry will continue to use its excess liquidity to purchase dollars as the exchange-rate is currently at an attractive level.

We expect the policy rate to end this year at 4.25% and we see the tightening cycle continuing in 2015 until the rate reaches 5.0%.

4. Calendar of monetary policy decisions in June



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