Itaú BBA - Central Banks Ease, Brazil Tightens

Global Monetary Policy Monitor

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Central Banks Ease, Brazil Tightens

February 4, 2015

The trend continued in February, as the Reserve Bank of Australia cut its interest rate by 0.25pp on Feb 3.

Monetary policy decisions were made during January in 23 countries or regions that we cover (including the euro zone and the UK). The headline was the European Central Bank (ECB) decision to announce a larger-than-expected QE program. Along with the ECB decision, eight central banks in different regions cut their interest rates, including Russia, which had hiked its interest rate significantly in December. All of them surprised the markets. Besides the countries that cut rates, some others – such as Hungary, South Africa, New Zealand, China and Singapore – modulated their communication to assume a more dovish tone, or they injected liquidity into the market through other monetary instruments than interest rates.

The trend continued in February, as the Reserve Bank of Australia cut its interest rate by 0.25pp on Feb 3. Running counter to global monetary expansion, the Brazilian Central Bank once again increased the Selic rate by 50 bps, to 12.25%. In the minutes of its meeting, the Copom affirmed that “the scenario of inflation convergence to 4.5% in 2016 has been strengthening,” but it warned that “advances attained in the fight against inflation (...) are still insufficient.” We believe that the minutes are consistent with our scenario of a final 25-bp increase in the next Copom meeting, taking the benchmark Selic rate to 12.50%.

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 rate


2. Charts

3. Monetary policy in LatAm

BRAZIL: Copom: Positive on Convergence

The Monetary Policy Committee of the Brazilian Central Bank (Copom) increased the Selic rate by 50 bps, to 12.25%, in its January meeting. In the minutes of the meeting, the Copom expressed confidence that inflation will converge to the target in 2016. Several aspects were highlighted in the international and domestic contexts.

A more disinflationary international scenario. The Copom reaffirmed that “risks to global financial stability remain high”, adding that, in 2014, growth rates in major economies were “lower than anticipated” (paragraph 21). The committee also emphasized “volatility in currency markets and moderation in the dynamics for commodity prices”. Addressing the recent drop in oil prices, the minutes pointed out that “regardless of the behavior of domestic gasoline prices, the evolution of international prices tends to be transmitted to the domestic economy through production chains, such as petrochemicals, as well as through inflation expectations”.

Favorable scenario to disinflation also in Brazil: below-potential GDP growth and a more restrictive fiscal policy. On the domestic front, the Copom argues that the “expansion rates of domestic absorption and GDP have converged and that the expansion pace of domestic activity will be below potential”. The outlook for fiscal policy is still one in which “the balance of the public sector tends to shift to the neutral zone”, but the Copom “does not rule out migration to the fiscal restraint area”. The Copom mentioned that a more “consistent and sustainable” fiscal policy allows “monetary policy actions to be fully transmitted to prices”.  

Credit expansion tends to be moderate, partly due to initiatives to reduce subsidies. In its core scenario, the committee assumes moderate credit expansion, reducing “exposure by banks” and leading to “deleveraging of the households”. For that to happen, the Copom mentioned “the initiatives to moderate subsidies granted through credit transactions”, including “recently-implemented actions”.

Limited concern regarding the secondary effects of 2015 shocks. Forecasts show higher inflation in 2015, but stability in 2016. Inflation forecasts for 2015 included in the minutes increased in both the reference scenario (stable exchange rates and interest rates) and the market’s scenario (interest rates and exchange rates according to the median of market expectations). The movement is probably related to the hike in the forecast for regulated prices inflation this year to 9.3% from 6%. However, forecasts for 2016 have remained relatively stable in both scenarios. The Copom’s own estimates are above the 4.5% target in 2015 and 2016.

The conclusion is that the Copom believes inflation convergence to the target in 2016 is becoming more likely. In light of the scenario outlined in the minutes, the Copom believes that “the scenario of inflation convergence to 4.5% in 2016 has been strengthening”.

But additional measures are still needed. The committee warned, however, that “advances attained in the fight against inflation (...) are still insufficient”, indicating that the monetary-tightening process is not completed yet. The Copom did not state that it “will do whatever it takes” to drive inflation to the target in 2016 (as it did in the last official communications) - a possible sign that, in the committee’s opinion most efforts were already implemented,.

Thus, we believe that the minutes are consistent with our scenario of a final 25bp-increase in the next Copom meeting, taking the benchmark Selic rate to 12.50%.

MEXICO: Rates Unchanged; Concerns Linger Over the Exchange Rate

Mexico’s central bank decided to maintain the policy rate at 3%, in line with consensus and our expectation. In the press statement announcing the decision, the board highlighted the recent sharp decline in inflation, but that wasn’t enough to change members’ mindset. According to the document, the balance of risks for inflation is unchanged from the previous meeting. In addition, the central bank again highlighted the evolution of the exchange rate as a key concern; it seems that the board downplayed the quantitative-easing program launched by the European central bank and the recent downside surprises in U.S. inflation. Our take is that the monetary-policy debate in Mexico is still only about when to hike, and that cuts are off the table. 

We currently expect the central bank to raise rates by the end of 2Q15, together with the Fed.

CHILE: Still No Cuts in Sight

In its January Monetary Policy Meeting, Chile’s central bank left its reference interest rate unchanged, at 3.0%, as widely expected. The press statement announcing the decision maintained a neutral tone. The minutes of the meeting revealed that the decision was unanimous and it was the only relevant option considered by the board.

On the international front, the key issue highlighted in the statement was the fall in commodity prices. The board pointed to the fact that international financial conditions for emerging economies has deteriorated, long-term rates in developed economies have fallen and the dollar continued to appreciate. It also reaffirmed the favorable outlook for activity in the U.S., while lower growth and inflation are anticipated in the euro zone and Japan.

On the domestic front, the board noted that activity is still weak, but it is in line with the evolution projected in the December Inflation Report. It also highlighted that the unemployment rate fell and nominal wages are still dynamic. The board also acknowledged that the favorable financial conditions domestically do reflect the monetary easing, which has already been implemented. The central bank noted that medium-term inflation expectations remain anchored at 3.0%, with the board noting that it will continue to carefully monitor the evolution of prices.

We expect the central bank to keep the monetary policy unchanged this year. In our view, Chile’s central bank is clearly comfortable with the current amount of monetary stimulus in the economy, and it will likely avoid adding more stimulus amid interest rate increases in the U.S. Still, we acknowledge that the probability of additional rate cuts is not small. First, the economy continues to evolve below potential. Also, lower oil prices will likely reduce headline inflation fast, which – mostly through indexation – will also help bring core inflation down. The possibility that the Fed delays the hiking cycle is also a risk for our interest rate call.

COLOMBIA: Rates Unchanged Despite Lower Growth Expectations

The central bank of Colombia decided to maintain its policy rate at 4.5% in its January meeting, as expected by us and the market overall. In the press conference, Governor Uribe revealed that the decision was unanimous. In the press statement announcing the decision, the central bank significantly reduced its expectation for GDP growth this year (to 3.6% from 4.3%) due to the persistence of lower oil prices. According to the central bank, some oil-related capital expenditure programs are already being cut. At the same time, the board’s assessment of inflation this year remains broadly the same. It expects the exchange-rate depreciation to have only a transitory impact on inflation. Also, the board believes that the effect of lower oil prices on the fiscal and external accounts will be partially mitigated by the weaker peso.  

We expect the central bank to remain on hold throughout the year, but we acknowledge that the possibility of rate cuts is on the rise. In fact, the downward revision in the growth rate for 2015 may be a sign that the central bank could be setting the scenario for additional relaxation. However, Governor Uribe recently noted that the acceleration in inflation reduced real interest rates and that monetary policy is probably expansionary, suggesting that the board is in no rush to cut interest rates.

PERU: Surprise Rate Cut; Reserve Requirements Lowered Too

Peru’s central bank cut the policy rate by 25 bps, to 3.25%, in its January meeting. The decision was a surprise, as both Itaú and market consensus (according to Bloomberg) had anticipated that rates would be kept on hold. The disappointing 0.3% year-over-year GDP growth rate recorded in November could have played a key role in the board’s decision.

This is the first rate cut since September last year (of the same magnitude). The board continues to maintain its easing bias by expressing that it would monitor inflation expectations and its determinants in order to, if necessary, implement additional easing measures. But it explicitly states that this decision does not imply a succession of further reductions.

The central bank has also implemented additional monetary easing through lowering the reserve requirement for local currency (recently cut to 8.5% from 9.0%, effective from the start of February). In addition, the central bank has been active in the foreign exchange market to smooth the depreciation of the local currency by using swap contracts, issuing dollar-linked certificates of deposit and intervening directly in the spot market.

Governor Velarde also recently communicated that he does not see the need for an aggressive monetary policy because activity is expected to recover in 2Q15. The governor sees the rebound as being driven by a strong fiscal impulse rather than by monetary policy. He added that the reserve requirement rate could be further lowered, marginally, but he believes that the rate is near the operating limit for banks, meaning that additional cuts would be less effective. The governor also drew attention to the fact that there is no reference rate throughout Latin America currently below 3.0%, suggesting that this could be viewed as a floor for interest rates.

We don’t expect additional rate cuts in Peru this year.


4. Calendar of monetary policy decisions in February


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