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China and LatAm in Opposite Directions

November 4, 2015

In Latin America Chile hiked rates by 0.25%, and Colombia there was a 0.50% surprise hike (market expectations were 0.25%).

In October, monetary policy decisions were made in 21 of the 31 countries we cover. China cut interest rates by 0.25 pp and reserve requirements by 0.50 pp. It marked the sixth month this year that saw stimulus announcements from the PBoC. In Latin America, there was a rate hike of 0.25% in Chile, and in Colombia the central bank surprised by hiking the interest rate by 0.50% (above the 0.25% hike expected by the market). In addition, the central bank of Colombia announced an intervention program in the FX market. Brazil's central bank maintained interest rates at a contractionary level, and it warned that it will remain "vigilant". Overall, central banks in Latin America are still concerned about containing the second-order effects of exchange-rate depreciation on inflation.

Among developed economies, despite the absence of fiscal measures, the month was active. In the U.S., the Fed continued to signal a liftoff in December (if data come in as expected). The ECB indicated new stimuli for December, and the BoJ was on hold, when some economists expected additional stimulus.


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: Extending inflation convergence

The Brazilian Central Bank’s Monetary Policy Committee (Copom) maintained its benchmark Selic rate at 14.25% in October. The decision was unanimous and in line with expectations.

The Committee amended the statement following the decision, modifying the objective to bring inflation to the target by “the relevant horizon for monetary policy" instead of by "end of 2016". Furthermore, the committee added a sentence highlighting that it will remain vigilant in order to reach this objective. The minutes of the meeting, published one week later, reinforce this signaling.

Exchange-rate depreciation and growing political/fiscal uncertainties have been pressuring inflation expectations, posing a risk to monetary policy. The deterioration in the balance of risks could prompt the Copom to resume its tightening cycle.

However, weak activity helps limiting the secondary effects of the currency depreciation and regulated price adjustments. Furthermore, current political/fiscal uncertainties warrant caution in defining monetary policy, and this helps reducing market volatility.

Abandoning the explicit statement of reaching the target in 2016 reinforces the perception that the BCB will concentrate its efforts into 2017 inflation. The inflation forecast on the quarterly report published in September was at 4.0% for the third quarter of 2017 in the reference scenario. The median of inflation expectations for 2017 was at 5.0% according to the latest Focus survey.

Extending the goal allows the Copom to adjust monetary policy only if the current shocks affect inflation in the longer term. For this extension to be effective, the Committee stressed that it will remain vigilant "regardless of the contours of other policies" We do not interpret the new statement as a signal of future timely interest rate adjustment, unless there are significant changes in the Copom's inflation forecast for 2017.

Hence, we maintain our scenario for a stable Selic rate at 14.25% until the end of 2016.


MEXICO: Unchanged Tone, In Spite of a More Hawkish Fed

Mexico’s central bank left the policy rate unchanged at 3.0%, as widely expected. The tone of the press statement was broadly unchanged from the previous decision. The board continues to highlight the weak cyclical conditions of the economy, the low inflation and well-behaved inflation expectations, while at the same time pledging to monitor closely the relative monetary policy stance of Mexico vis-à-vis that of the U.S.

Considering that the Fed’s statement in October signaled clearly that the December liftoff is on the table, the fact that Mexico’s central bank did not introduce new hawkish elements in the statement suggests that the board is open to the alternative of hiking after the Fed does, especially if the exchange-rate market remains well-behaved.

We expect Mexico’s central bank to raise rates only in 1Q16, after the first Fed move in December. The output gap in Mexico remains negative, narrowing only gradually, and inflation is very well-behaved. So in our view the central bank would not raise rates this year unless the Fed’s liftoff trigger an excessive exchange-rate volatility.


CHILE: A short tightening cycle begins

The central bank of Chile raised its policy rate by 25 basis points to 3.25% in the October meeting, as expected by us. The decision ends the 11-month spell during which the rate was held at 3.0% and received the full backing from the board of the central bank.

The tightening cycle will likely be modest. The central bank continues to signal hikes totaling 50 or 75 bps, so monetary policy would remain expansionary after the cycle ends. Governor Vergara recently reiterated this stance.

The timing of the next hike is uncertain. On one hand, a board member mentioned explicitly that, by hiking now, it was not clear how immediate an additional hike should be. On the other hand, another member suggested that the board could also consider hiking by 50 bps in October and remove the tightening bias at the same time.

We expect only one additional rate hike of 25-bps, in November, as the economy continues sluggish. Moreover, we think that downside surprises on inflation, or even the absence of upside surprises, may lead the central bank to delay the next hike.


COLOMBIA: Surprise 50-bp rate hike and a FX auction program

The board of the Colombian central bank decided to increase its monetary policy rate by 50-basis points to 5.25% in its October meeting and announced an auction program of dollar call options aimed at curbing the volatility of the Colombian peso. Both measures constitute a surprise to most of the market who predominantly expected a smaller 25-bp hike. In the press conference, governor Uribe indicated the decision was not unanimous.

The main reason for the central bank to increase the policy rate was to contain the potential second-round effects from the temporary shocks (El Niño weather phenomenon and the depreciation of the exchange-rate) that are affecting current inflation.

Albeit larger than expected, this hike might not be the last one in the current tightening cycle. In the September meeting, the board indicated that, given the information available at the time, the 25-bp rate increase was consistent with inflation converging to the target. On this occasion, the board pointed at the hike as a necessary - but not a sufficient - condition for inflation convergence.

Moreover, the central bank announced an exchange-rate intervention program through options. Call options on the US dollar for USD 500 million will be offered on days when the official exchange rate exceeds its 20-day moving average by 7% or more. The options will have a maturity of one month and can only be exercised if the exchange rate upon maturity is at least 7% above its moving average. The decision to intervene now is, in our view, linked to the increased probability of a December liftoff by the Fed.

Prior to the announcement, we expected the central bank of Colombia to take the policy rate to 5.25% by 1Q16. Our call included a 25-bp hike in October’s meeting followed by another hike of similar magnitude in early 2016. So the risks to our monetary policy rate forecast are tilted to the upside.


PERU: Rates on hold 

As widely expected, Peru’s central bank held its policy rate at 3.5% in the October meeting. This follows on from the surprise 25-bp rate hike in the previous month. Governor Velarde communicated the two most recent monthly meetings that, given the available data, there would likely be no reason to increase borrowing costs in October or in November. In September, inflation surprised to the downside, while the core reading also came in lower, and the Peruvian sol has partly undone the notable depreciation recorded in August, thereby providing space for the central bank to withhold additional rate hikes.

The press release accompanying the October decision retained a tightening bias. The board indicated that they are attentively monitoring inflation and inflation expectations to evaluate the necessity of rate adjustments. The press release notes that inflation has been affected by temporary supply-side shocks. Activity is expected to grow near its potential in 2016. 

We expect the central bank to remain on hold for the remainder of this year (leaving the rate at 3.5%), but we do see rate hikes continuing next year, taking the policy rate to 4.0% in 1H16.


4. Calendar of monetary policy decisions in November

 * Source: Bloomberg


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