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Global Monetary Policy Monitor

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Central Banks on hold

January 6, 2014

Nineteen countries announced monetary policy decisions in December, but only Hungary and Sweden changed their monetary policy target rate, both downward.

Nineteen countries announced monetary policy decisions in December, but only Hungary and Sweden changed their monetary policy target rate, both downward. Countries that had been cutting rates, such as Chile and Mexico, or hiking, such as Indonesia, kept interest rates on hold. The Brazilian central bank, which did not have a monetary policy decision in December, should hike its policy rate again this month. But its tightening cycle should be close to an end, as indicated by the central bank’s 4Q inflation report.

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: Monetary tightening cycle close to the end

Brazil’s Central Bank (BCB) released in December its 4Q13 Inflation Report. Inflation forecasts for 2014 and 2015 remain above the mid-point target, but show a downward trend throughout the forecasting horizon. The BCB continued to argue for vigilance in monetary policy, though emphasizing the lagged and uncertain effect of already-implemented measures to inflation.

Regarding the uncertainties related to the transmission of monetary policy actions to inflation, the authority also stated that “this uncertainty may increase - and in fact has been increasing - in an environment such as the current one, in which volatility of financial markets has been intensified by sharp steepening of the yield curve in mature economies, and particularly in the U.S.”

Additionally, the BCB repeated that “in moments like this, monetary policy must remain especially vigilant” to minimize risks of inflation resilience.

In our view, declining inflation forecasts and Central Bank communication indicate that the end of the tightening cycle is near. We maintain our forecast of a 25 bp Selic rate hike in the January meeting to 10.25% p.a., remaining at that level until the end of 2014. However, if surprises with inflation, similar to what we saw in the middle of this month, keep occurring in the beginning of next year, there may be additional adjustments in interest rates.

Mexico: Central Bank maintained the policy rate unchanged, at 3.5%

As was widely expected, the Mexican Central Bank maintained the policy rate unchanged, at 3.5%, in its last decision of 2013. The statement that followed the decision revealed no surprises, given the maintenance of a neutral bias in the central bank’s guidance for future policy moves. The board again pledged to monitor the domestic economic progress, the potential second-round effects of the tax hikes to be introduced this year and Mexico’s relative monetary policy stance vis-à-vis the U.S.

We believe that the Mexican economy will continue to recover in the coming months, and expect inflation to remain within the target range but above the 3% target. In this scenario, the central bank is likely to keep the policy rate at 3.5%, at least until the beginning of 2015.  


Chile: Rate Unchanged, but an easing bias remains

As expected, the Chilean Central Bank left the policy rate unchanged, at 4.5%, at its last monetary policy meeting of the year. The decision to hold rates, which followed two consecutive 25-bp rate cuts, was unanimous, according to the minutes of the meeting. However, board members also considered an additional rate cut to be a “relevant option”, implying that the easing bias remains.

According to the board, while another interest rate cut would be consistent with the path outlined in the latest monetary policy report (which indicated “some additional monetary stimulus”) there were many factors to justify maintaining rates unchanged in December. First, although all board members agreed that the October IMACEC data (monthly GDP proxy) was weaker than expected, they saw the economic deceleration as smooth. Second, the monetary policy was already looser than a few months earlier as a result of the two previous interest rate cuts, at a time when credit continues to flow to households and corporations. Third, the weaker real exchange rate is likely to help rebalance the country’s economic growth. Finally, the board indicated that a third consecutive cut could signal a “greater urgency regarding the fragility of the national economy and lead to an additional correction of the expected path for the policy rate, which would not be in line with the monetary policy report.”

We see the decision to maintain the policy rate at 4.5% as only a pause, and continue to expect the central bank to resume the easing cycle in 1Q14. Specifically, our scenario calls for two additional 25-bp rate cuts during 1Q14.


Peru: Another cut in reserve requirements for the domestic currency, but no policy rate cuts

The Central Bank of Peru maintained the interest rate at 4.0% during its monetary policy meeting in December, in line with both our estimate and market consensus. The decision to keep rates on hold followed a 25-bp cut the previous month. The press release following the decision provide no hint of additional rate cuts going forward. According to the board, the current interest rate is consistent with the convergence of the CPI toward the 2% target in 2014-15. The central bank added that inflation is high (close to the upper bound of the target range) due to temporary factors (past supply shocks). Regarding growth, board members acknowledged the slowdown in local activity fueled by the decreased dynamics of the country’s trade partners as well as the decline in export prices. However, the central bank expects higher economic growth figure for 4Q13.

Although the central bank left the policy rate unchanged in December, it once again lowered the reserve requirements for the domestic currency. In fact, recent statements by Central Bank Governor Julio Velarde stressed the preference for monetary easing through macro-prudential measures instead of lower policy rates. This is a consequence of the partial dollarization of the Peruvian economy in a dollar-strengthening environment.

We expect the central bank to resume the easing cycle at the beginning of 2014. In our view, the below-trend growth is likely to lead the board of the bank to ease further monetary policy, both through lower interest rates and through a reduction in reserve requirements.


Colombia: Divisions Within the Board Emerge

The central bank of Colombia kept the policy rate at 3.25% in December. The minutes of the meeting revealed that the board is divided on future polity moves, even though it unanimously voted for keeping the policy rate unchanged. While in the previous decision, all board members seemed to agree on an easing bias, now, only part of the board (not the majority) believed that interest rate cuts could be necessary to close the output gap and bring inflation back to the target.

Specifically, some board members think that the low inflation readings are due to supply shocks, and they emphasized that the current monetary policy stance is expansionary, the 12-month ahead inflation expectations are near the center of the target and that the recent internal demand and GDP numbers came in strong.

However, other members believe that because inflation has been below the target for many months, the potential GDP could be higher than estimated and therefore “adjustments” in the policy rate may be necessary to achieve the inflation target and a zero output gap.

We expect the central bank of Colombia to reduce the policy rate by 25 bps during 1Q14. In our view, the strong economic growth numbers published recently are temporary, which combined with the low inflation readings will likely convince the board to add more monetary stimulus.


4. Calendar of monetary policy decisions in January

 * Source: Bloomberg


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