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Central banks withdrew stimuli again

March 5, 2018

The number of central banks raising rates was higher than the number of CBs cutting rates, maintaining the stimuli-reduction trend seen since the end of 2017.

In February, there were monetary policy decisions in 19 of the 33 countries we monitor, with rate reduction only in Brazil and rate hikes in Mexico and the Czech Republic.

In Brazil, the central bank cut the policy rate by 25bps, in line with the market consensus, and signaled that the end of the easing cycle is near. In Mexico and the Czech Republic, central banks hiked interest rates by 25bps, both in line with expectations.

The number of central banks raising interest rates was higher than the number of central banks cutting rates, maintaining the stimulus removal trend observed since the end of last year.

In March, the main developed countries’ central banks will hold policy meetings. The Fed will likely hike interest rates and raise the dots (which represent committee members' expectations for upcoming rate hikes) to signal four hikes in 2018 and three hikes in 2019 (up from 3+2 at the December meeting). In Europe, the ECB will probably maintain its forward guidance, while in Japan the BoJ will likely keep a more dovish tone, and in the UK the BoE will probably indicate that at the May meeting a 25-bp hike is likely. 

 

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

Argentina’s central bank left its benchmark interest rate (7-day repo rate) unchanged, at 27.25%, in both decisions held in February. In the press release accompanying the second monetary policy decision of the month, the central bank noted that, according to its high-frequency indicators, core inflation in February will be higher than those registered in January and in 4Q17. In this context, the central bank adopted a more conservative tone, indicating there is no room to ease monetary policy currently. Specifically, the central bank stated that it will act with extreme caution and will wait for disinflation signals before easing monetary policy further. Given the expectation of high readings for the upcoming CPI data, rising inflation expectations, and also because a new round of regulated price increases is scheduled for April, the central bank will likely stay on-hold in the very near term.

In February, the Brazilian Central Bank’s Monetary Policy Committee (Copom) signaled that the end of the easing cycle is near, after reducing the Selic rate to 6.75% per year, a new record low level. There was strong market consensus around this decision, given the committee's communication that if the baseline scenario were to evolve as expected, it would be appropriate to moderately reduce the monetary easing pace vis-à-vis the 50-bp cut delivered at the previous meeting. Given the lack of significant changes in the baseline scenario or in the balance of risks since the previous meeting, the decision naturally confirmed the expectations of a 25-bp reduction. In the minutes, the main message was that the Copom intends to stay on hold in its upcoming decision (March 21), unless there are continued downward inflation surprises in Brazil, particularly in a context of lower inflation concerns in developed economies (especially the U.S.). In response to the signaling, we revised our forecast for the Selic rate at the end of the cycle from 6.50% to 6.75%, a level that will likely be maintained throughout the year. As usual, the statement also stressed that this assessment may change in the event of surprises in the baseline scenario or changes in the balance of risks. In this sense, the inflation data released following the Copom’s decision (weak IPCA reading in January, much below expectations; low IPCA-15 in February, in line with market consensus) increased at the margin the probability of a final rate cut in March. We acknowledge that the upcoming decision is very dependent on forthcoming data releases, which may shift the balance of risks and lead the Copom to opt for an additional 25-bp cut.

In February, the Chilean central bank did not hold a monetary policy meeting. Starting this year, the central bank reduced the frequency of its monetary policy meetings from every month to only eight times per year. The next meeting will take place on March 20 and the quarterly Inflation Report will be published the following day. Nevertheless, the minutes from the meeting at the close of January show the decision to hold the policy rate at 2.5% had the full support of the board and confirmed a consolidation of the rates-on-hold baseline scenario. Several board members agreed recent data reduce the risks, to both activity and inflation, outlined in the 4Q17 Inflation Report. Yet, in retaining the easing bias, all board members stated that attention must be paid to how potential downward deviations of inflation could risk the convergence to the 3% target over the policy horizon. Nonetheless, the risks of the recent appreciation of the exchange rate to the medium-term inflation expectations were deemed limited. We expect the policy rate to remain stable at 2.5% during 2018 as inflation stays low and the activity recovery unfolds.

The Colombian central bank also only returns to monetary policy rate meetings later this month as it too adopts an eight decisions per year schedule. However, the central bank published the quarterly Inflation Report in which overall satisfaction with the disinflation process was expressed, but concern remains for sticky non-tradable inflation. A yearend inflation rate near 3% is expected. Meanwhile, an activity recovery to 2.7% (from 1.8% last year) is forecasted as external demand improves and terms-of-trade recover. Under these conditions, the central bank reaffirmed the end of the easing cycle. However, the messaging from the central bank is more apt to data-dependency rather than an unequivocal end to the cycle as it has been expressed that faster disinflation ahead could lead to more easing. We continue to see space for the continuation of the easing cycle with two additional 25-bp rate cuts (to 4%). A negative output gap and a stronger currency will likely contribute to the disinflation towards the target.

The Central Bank of Mexico (Banxico) hiked the reference rate by 25bps (to 7.50%) at its first meeting of the year, in line with our call and an almost unanimous market consensus. Given risks related to NAFTA, elections and monetary policy in the U.S. (amid still high inflation readings), the central bank kept the doors open for further hikes, by saying that “monetary policy will act, if necessary, firmly and opportunely to ensure inflation expectation anchoring and the convergence of inflation to the target”. Furthermore, the board’s view on the balance of risks for inflation is unchanged (and continues tilted to the upside). However, when mentioning the factors it will monitor for the upcoming decisions, the central bank did not list first the relative monetary policy stance between Mexico and the U.S. (moving it to second position). Furthermore, the board affirmed that the February hike already took into account the expected rate increase by the Fed for March. Board Member Javier Guzman, considered to be in the hawkish camp of the board, reaffirmed the same message. Following the decision, the central bank published its first quarterly inflation report of the year (and the first since Alejandro Diaz de León became the bank’s governor), with a greater emphasis on the role that inflation forecasts will play in the board’s decision framework, suggesting the board (or at least most of its members) want to be less reactive to exchange rate developments than in the recent past. In all, we see the recent communication as consistent with our view that a pause in April is likely.

The Central Bank of Peru (BCRP) decided to maintain the reference rate at 3% in February, in line with market expectations, even though inflation fell substantially in the last few months and GDP growth disappointed in 4Q17. The situation has not changed since the latest decision. Annual headline inflation fell to 1.2% in February (from 1.3% in January) – approaching the lower bound the 1pp tolerance range around the 2% target – and incoming activity data points to modest growth of the GDP proxy in January. In this context, we expect the central bank to deliver a 25-bp rate cut in March. The political crisis and its adverse spillovers to activity will likely play a role in the decision. Subsequently, we expect the central bank to maintain the policy rate unchanged, at 2.75%, until the end of this year, but we acknowledge there are risks of further easing. 

 

4. Calendar of monetary policy decisions in March



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