Itaú BBA - Central banks in advanced countries react to global uncertainties

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Central banks in advanced countries react to global uncertainties

February 2, 2016

The highlight was the (likely coordinated) reaction of central banks in advanced countries towards global growth uncertainties.

In January, 19 of the 31 countries we monitor made monetary policy decisions. Japan and Indonesia cut interest rates, while Colombia, Peru and South Africa, as expected, continued to raise them.

This month’s highlight, however, was the (likely coordinated) reaction of central banks in advanced countries towards global growth uncertainties, reinforced by China’s stock market drop and the fall in oil prices. The Fed said it is monitoring the global economic and financial situation, and in our view it may not raise interest rates in March, as expected by some market participants. The ECB signaled a fresh round of stimulus in March. The Bank of Japan sent interest rates into negative territory, taking the market by surprise.

Moving in the opposite direction, monetary policy in Latin America continues to tighten.  Peru, Colombia, Chile and Mexico find themselves in tightening cycles, but only Colombia’s central bank has been raising rates at every meeting since the beginning of the cycle. Brazil was also expected to increase interest rates. But its central bank unexpectedly held rates at their current level, citing increasing domestic and “principally, external” uncertainties.


 

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: Stable Selic, after all

In January, the Central Bank’s Monetary Policy Committee (COPOM) maintained the SELIC rate stable at 14.25% p.a. The decision was in contrast to recent  BCB’s communication, but in line with the signal expressed in a note released at the meeting’s eve, in which the BCB governor evaluated as relevant  for the COPOM decision the revision of the IMF’s GDP growth forecast for Brazil (before yesterday’s note, a 50-bp hike was expected).

In the minutes, the Copom emphasized it was increasingly concerned about the global scenario, pointing out that “uncertainties have grown”. It added that “in the context of diminishing levels of activity, there are growing concerns about the Chinese economy and its repercussions for the other economies”.

Falling oil prices pose additional risks to the global economy. The Copom emphasized “increasing uncertainties driven by lower oil prices and its impact on companies and producers, as well as on financial markets in general, with risks to global financial stability”.

Weaker domestic activity. The committed stated that “domestic activity will expand at a lower rate than previously predicted”. Furthermore, it added that the data confirm “the increasing distention” of the job market.

Inflation projections higher than reported in the previous minutes, but in line with forecasts of the quarterly report. Inflation projections in the reference scenario (constant exchange and interest rates) have risen when compared to the minutes of the November meeting, but appear to reflect the projections of the December inflation report (“slightly” ahead of the 4.5% target for 2017). In the market scenario (interest and exchange rates expected by the market), the 2016 projection has risen relative to the November minutes, while the 2017 projection has fallen and, just as in the reference scenario, is “slightly” above the 4.5% target.

The Copom removed its urgency for immediate action to fight inflation. It took out the expression “especially” in the phrase “monetary policy must remain especially vigilant”. It also commented that “increasing uncertainty (...) justifies continuing to monitor the evolution of the macroeconomic scenario to subsequently define the next steps in the monetary policy strategy. However, this monitoring is no longer restricted to “until its next meeting”, as had been announced in the previous minutes.

And indicated the possible strengthening of the convergence of inflation to the center of target in 2017. The Copom said that recent changes on the domestic and external environments, alongside previous monetary policy adjustments, could “strengthen the scenario of inflation converging toward the 4.5% target in 2017”.

We expect that the Selic rate will remain stable at 14.25% for the rest of the year.

CHILE – A gradual removal of stimulus

The central bank of Chile’s decision to leave the policy rate unchanged at 3.50% in January was unanimous, according to the minutes of the meeting. The decision followed a rate increase of 25-bps in December (the second hike in a tightening cycle that started in October).

The options of hiking the policy rate and leaving it unchanged were both considered at the meeting. According to the minutes, hiking could have been justified by still high inflation and a dynamic labor market, while the policy rate remains expansionary. Also, exchange-rate weakening would continue to put pressure on tradable prices ahead. On the other hand, holding the rate was deemed consistent with the scenario laid out in the inflation report (IPoM) published in December, because the board still sees inflation unfolding in line with this scenario, and could even adjust faster amid low oil prices. Furthermore, the central bank now sees a higher probability of the downside risks to growth materializing. 

We continue to expect two 25-basis point hikes this year (between 2Q16 and 3Q16), taking the rate to 4%. The central bank will continue to gradually withdraw its monetary stimulus amid still weak activity and a slow deceleration of inflation. The central bank would leave the rate unchanged (at an expansionary level) until the end of 2017, as the exchange-rate stabilization and low growth contribute to the slowdown of inflation.

COLOMBIA - The hiking cycle continues

The central bank increased the policy rate, as was widely expected, to 6.0% from 5.75% in January. Since it began its tightening cycle in September, the central bank has raised the policy rate by a total of 150 bps. Inflation accelerated to 6.8% year over year in December (6.4% previously) and inflation expectations remain elevated (although they have started to cool more recently). In the press conference, Governor Uribe said the decision was not unanimous, as was the case in the previous four months. Last month, the minority vote was for a 50-bp hike.

In the statement, the central bank highlighted the level of inflation expectations. Inflation expectation surveys showed some retreat in the month and are currently sitting at 4.5% for one year ahead and 3.7% for two years, the relevant policy horizon, while asset prices point at inflation above 4.5% for all horizons. On activity, it was mentioned that growth in 4Q15 likely remained stable from 3Q. The technical team expects the economy to have grown 3.0% in 2015, while the economy would decelerate to 2.7% this year, (Itaú expects growth of 3.0% last year and 2.5% in 2016). The board still only sees a moderate risk that activity decelerates beyond what is consistent with fundamentals (that is, lower oil price).

The press release did not signal a near-term end to the tightening cycle. The board reiterated that it has decided to continue with the 25-bp hiking pace to ensure that inflation converges to the target range in 2017.

We expect two more rate hikes in this cycle, so the central bank of Colombia would take the policy rate to 6.5% by the end of 1Q16. The rate would remain unchanged until the end of 2016 as a widening output gap and a milder currency depreciation contribute to a deceleration of inflation towards the end of the year.

PERU - Eyeing more rate hikes

The central bank hiked its monetary policy rate by 25 basis points, to 4.00%, as expected in its January monetary policy meeting. The decision followed a hike of the equivalent magnitude in the previous month. The tightening cycle, which started in September 2015, now totals 75 basis points. The decision came amid accelerating inflation and some recovery in activity.

The central bank board retained a tightening bias, hinting that additional hikes could come to ensure that inflation converges to the target. The board noted that while they see inflation converging towards the 1%-3% target range in 2016, inflation expectations remain above this range.

We anticipate additional tightening of two 25-basis points during the first half of the year. The policy rate would remain at 4.50% throughout 2017. In our view, the timing of the next hikes will mostly be determined by incoming data, particularly inflation.


 

4. Calendar of monetary policy decisions in February



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