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Global Monetary Policy Monitor

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Central Banks in Steady trend

April 7, 2014

Monetary policy decisions were announced in 20 of the countries we cover in March

Monetary policy decisions were announced in 20 of the countries we cover in March and early April. Three countries (Hungary, Chile and Thailand) reduced interest rates continuing their easing cycles. Similarly, the Peruvian Central Bank announced an additional cut in its reserve requirement rate.

Brazil was the only country to raise interest rates during the period, continuing the cycle that began in April 2013. The post-meeting statement, however, signaled the Central Bank’s intention to end the cycle in the near future.

Among the G7 countries, the FOMC continued to taper its monetary stimulus, while the ECB kept interest rates unchanged, but with a dovish sign for its future steps.

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: Copom: Close to the end, food inflation is a risk

The Brazilian Central Bank’s Copom decided unanimously to raise the Selic rate by 25 bps, to 11.00%, without bias, as expected.

Importantly, the Copom changed the post-meeting statement to signal the end of the tightening cycle:

“The Copom unanimously decided, at this moment, to increase the Selic rate to 11.00 percent, without bias. The Committee will monitor the evolution of the macroeconomic scenario until its next meeting, to then decide the next steps on its monetary policy strategy”.

By removing the expression “continuing the adjustment process” from the last statement, and by adding “at this moment”, the Copom signals, in our view, the intention to end the tightening cycle briefly.

Also in today’s statement the Copom included an additional signal of ending the cycle: “The Committee will monitor the evolution of the macroeconomic scenario until its next meeting, to then decide the next steps on its monetary policy strategy”, since it has used this phrase in the past before changing the pace of its interest rate moves. The only flexibility introduced by the Copom is not including the word “closely” in “The Committee will closely monitor” (“monitorar atentamente”). This leaves just a bit of room for one additional rate-hike in May. The persistence of the current food inflation shock could lead to this scenario.

The statement is consistent with our scenario that the Copom will keep the Selic rate at 11.00% (or, at most, 11.25%) until the end of this year.

Mexico: Softer Tone

As was widely expected, the Mexican Central Bank kept its policy rate unchanged at the monetary policy meeting in March, but the tone of both the press statement and the minutes softened. In January, when the previous policy decision was made, the board stated that the balance of risks for inflation had worsened due to global market volatility and the potential second-round effects of the high headline inflation. At that time, the board also saw a better balance of risks for the country’s activity. After that, Mexico’s activity numbers disappointed and inflation has fallen substantially. As a result, in March’s decision the board stated that the balance of risks for inflation has improved “at the margin.” Moreover, the concluding remarks of the statement cite the evolution of the output gap as one of the factors to be monitored in upcoming meetings. The minutes later revealed that most board members believe that the 3%-4% GDP forecast published in the latest inflation report will fall in the next report. Nevertheless, the board maintained that it will also monitor the monetary policy stance relative to the U.S. So, in our view, a neutral bias remains.

We don’t expect policy rate moves in Mexico this year and see a hiking cycle starting in the first half of 2015, as the FED also begins to raise its policy rate. In our view, the central bank’s recent communication suggests that the board is more inclined to postpone rate hikes than to cut rates. We note that after March’s decision there were some signs of improved activity (for example, manufacturing exports and manufacturing PMI). In a recent interview, Governor Carstens classified the recent economic data as “encouraging”; however, we believe that a debate over rate cuts may emerge if activity fails to pick up soon.

Chile: A more “moderate” easing bias

Chile’s central bank reduced the policy rate by 25 bps, as expected by us and the majority of market analysts. In the concluding remarks of the press statement, the board said that “it will evaluate the possibility of introducing additional interest-rate cuts, according to the evolution of internal and external macro variables and its implications for the inflation outlook”. Thus, an easing bias still holds, but the board is expressing it with different wording (in the statement announcing the previous decision, the board said  it “estimates that over the next months an additional monetary stimulus could be needed to ensure that forecasted inflation stays at 3% in the monetary policy horizon.”) Governor Vergara later clarified that the easing bias is now more “moderate”, meaning that the central bank is more cautious on further rate cuts. The minutes of the meeting showed that, although the board is still treating the exchange-rate depreciation as a once-off shock for prices, the board is somewhat less comfortable with the weakening of the currency and its potential second-round effects on inflation. 

We expect the central bank to leave rates unchanged in April. However, the central bank will likely resume the easing cycle in the subsequent months. We expect another two 25-bp rate cuts, so the easing cycle would end once the policy rate reaches 3.5%.  

Peru: Further Easing Through Reserve Requirements

The Peruvian central bank left the interest rate unchanged at 4.0% in March, as expected. However, the central bank once again eased policy through lower reserve requirements for local currency (from 12.5% to 12%), effective from April. According to the press statement announcing the decision, since June 2013 – when the central bank started to lower reserve requirements – almost 8 billion soles to the economy was untied. With the latest reduction, the central bank estimates that liquidity supply will increase by 0.5 billion soles.

Also according to the press statement the lower reserve requirements have boosted credit growth denominated in local currency (24.8% year over year in February), while dollar credit growth has slowed (1.3% year over year in February). Overall credit growth has been pretty stable, at 14.2%.

We don’t expect interest rate moves anytime soon in Peru. In addition, we think that the room for additional reductions in reserve requirements is much smaller now, as inflation is running above the target range, local-currency credit has been strong and activity seems to be picking-up.

Colombia: Unchanged Policy Rate and Extended Dollar Purchase Program

The central bank left the interest rate unchanged at 3.25%, in line with both our expectations and the market consensus. In addition, the central bank announced it would continue its dollar purchase program, buying up to USD 1 billion from April to June. This is the same amount that was planned for the first three months of this year, but we note that the central bank has been purchasing dollars at a slower pace than USD 1 billion per quarter. In the first quarter of this year, the central bank bought USD 612 million. In our view, the recent appreciation of the Colombian peso (which was helped by the increased weighting of Colombian bonds in a local bond benchmark index) likely influenced the decision to keep accumulating reserves.

In the minutes of the meeting, board members highlighted the dynamism of internal demand during the second half of 2013 and the beginning of 2014, while inflation has increased in line with expectations (currently inflation is below the center of the target range). According to the board, this suggests that the output gap and the deviation of inflation from the target will gradually close throughout 2014.

We see the beginning of a tightening cycle in 4Q14, with hikes of 50-bps (to 3.75%). In 2015 we expect the tightening cycle to continue with further 50-bps rate hikes (to 4.25%).

4. Calendar of monetary policy decisions in April

 * Source: Bloomberg



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