Itaú BBA - Emerging markets keep reducing rates (except Argentina)

Global Monetary Policy Monitor

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Emerging markets keep reducing rates (except Argentina)

November 8, 2017

There were monetary policy decisions in 20 of the 33 countries we monitor, with rate cuts in 3 emerging economies

In October, there were monetary policy decisions in 20 of the 33 countries we monitor, with rate cuts in 3 emerging economies, a rate hike in Argentina and the announcement less of monetary stimulus in the Eurozone.

The countries that reduced their policy rates were: Colombia (by 25 bps, while maintenance was expected), Russia (by 25 bps, in line with expectations) and Brazil (by 75 bps, in line with expectations). Argentina, on the other hand, hiked the policy rate by 150 bps, against markets’ expectation of staying on hold. In the Eurozone, the ECB announced it will reduce its asset purchasing program to EUR 30bn (from 60bn) for nine months, starting in January 2018.

Therefore, the number of central banks reducing interest rates remained above the number of central banks increasing the policy rate in October.

In November, the Fed has already signaled it will likely increase rates again in December. Central banks in the UK and Czech Republic hiked rates by 25 bps and in Argentina the BCRA increased the policy rate again, by 100 bps. In Australia, Poland and Thailand the central banks stayed on hold.

Looking forward to the remainder of the month, we expect that in Latin America there will be a 25-bp reduction in Peru and rates will be maintained at their current levels in Argentina and Chile. In Colombia, the lower-than-expected October’s CPI increases the probability of another rate cut this month. The minutes of the most recent policy decision will shed more light on the likelihood of a consecutive rate cut. Elsewhere, we expect Korea will hike rates by the end of the month.


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 hiked the monetary policy rate by 100 bps, to 28.75% in early November, following a 150-bp hike two weeks before. Both decisions were unexpected. The first hike was a response to the higher-than-expected September CPI, while the second hike was likely due to the increase in inflation expectations according to the central bank survey with market analysts. Specifically, analysts revised their 2018 inflation forecasts upward for a fifth consecutive month, to 16.0% (from 15.8% previously). For the next 12 months, the market expects inflation of 17.3% (surpassing the 16.9% posted in September). Both readings exceed the upper bound of the 10% (±2%) target range for next year. As confidence rises, activity in Argentina is performing strongly, so it is unlikely that the output gap will help to b ring inflation down. Governor Federico Sturzenegger recently indicated the central bank could slow down reserve accumulation (currently reserves are rising fast as the central bank acquires the dollars related to government debt issuance). However, in our view given the already wide current account deficit, it is also not clear whether there is room for a substantial help from the exchange rate to inflation. Amid this challenging environment for monetary policy, the risks in the short term continue skewed towards rate hikes.

In Brazil, the Monetary Policy Committee (Copom) delivered in October a widely expected 75-bp rate cut, to 7.5% p.a., in an unanimous vote. The meeting statement and its minutes suggest that the plan is still to slow down the pace of easing moderately. We read this as a signal that the next move (on December 6) will probably be a reduction of 50 bps, but the February 2018 decision was left wide open. The committee continues to have a benign reading of inflation, but it has removed language that emphasized such assessment. The Copom stressed that the economy faces favorable and unfavorable price shocks, the former referring to falling food prices and the latter to rising energy costs. They also stated that they intend to fight the second-round effects of these shocks in a symmetric way. Regarding economic activity, the minutes show that the committee discussed the latest figures, which were quite soft, but also the chances of a stronger recovery going forward. Committee members concluded that such short-term fluctuations are unlikely to cause material changes in prospective inflation. The committee removed from the statement a sentence that indicated its preference for a gradual ending, suggesting that the next 50-bp cut in December may be its last or, alternatively, that an additional 50-bp cut may be announced in February 2018. In the minutes, the committee emphasized a flight plan that takes the Selic to 7.0% by year-end, but the February decision was purposefully left open. This suggests that the Copom may consider, given the magnitude of economic slack and the balance of risks for the basic scenario, that a little more stimulus may be appropriate. We thus maintain for now our year-end forecasts for the Selic benchmark rate at 7.0% for 2017 and 6.5 % for 2018.

As widely expected by the market, the central bank of Chile held the policy rate at 2.5% in October. However, building on the downside inflation surprise in September, the press release added an easing bias. Still, the minutes of the meeting revealed that the board unanimously voted to leave the policy rate unchanged, as members agreed that the recent downward inflation surprise was mainly due to prices exhibiting high volatility. The central bank considered the baseline scenario outlined in the 3Q17 Inflation Report (IPoM) did not change meaningfully, after the technical team indicated the latest inflation data would delay inflation convergence to the 3% target by just one quarter. Overall, given the economy is recovering the board is yet to be convinced that the inflation convergence to the target has been compromised. < strong>Our baseline scenario is for the central bank to leave the policy rate unchanged at 2.5% for the rest of this year and most of 2018. The October CPI, published after the most recent policy decision, came in above expectations almost fully offsetting the negative surprise the previous month, reducing the probability of rate cuts in the near term.  

Colombia’s central bank surprised the market by resuming interest rate cuts with a 25-bp move, after staying on hold for only one month. According to the statement announcing the decision, five board members voted for a rate cut, while two members favored staying on hold. This is a sharp contrast with the previous decision, when only two board members voted for a cut (with the rest of the board voting to keep the policy rate unchanged). The board is more confident about an activity recovery but still expects growth next year to be below potential. Furthermore, with the lower-than-expected inflation increase in September, the central bank is more comfortable with the inflation outlook. The central bank warned that this move should not be seen as the beginning of a cycle of continuous rate cuts, as externa l-scenario risks limit the room for counter-cyclical monetary policy. But in a recent press interview, General Manager Juan Echavarría provided a more flexible guidance, suggesting the bank is open for a “sequence (albeit not consecutive) of rate cuts next year”. We maintain our forecast that the easing cycle will end with a policy rate of 4.5%, following two additional 25-bp rate cuts. The timing of rate cuts will depend on activity and inflation data. Amid a more favorable evolution of inflation and a still-incipient recovery, we acknowledge that the central bank seems willing to deliver more stimulus than we currently forecast. However, some factors may stand in the way of a more aggressive monetary policy response: the combination of a wide current account deficit and rising interest rates in the U.S.; stronger global growth and its spill-overs to the Colombian economy; the fact that underlying inflation measures (such as non-tradable inflation) remain stic ky.

The Central Bank of Mexico (Banxico) remains on-hold. After hiking rates for seven consecutive meetings, the board has left the policy rate at 7% in the last two meetings, August and September. However, amid growing uncertainty over NAFTA, presidential elections and the Fed, in an environment of still-high inflation, the central bank decided to resume exchange-rate intervention through swaps. In this context, two members of Banxico’s board see a possibility of rate hikes, but the three-member majority seems comfortable with the current policy stance (also not seeing room for rate cuts). Our base case is that the policy rate will be kept at 7% at least until the beginning of 2H18. We highlight that this month’s monetary policy decision will be the last one headed by Governor Carstens, who is departing from the central bank by the end of November, but we do not expect the change of leadership in the central bank to affect monetary policy guidance.

The Central Bank of Peru (BCRP) will hold its monthly monetary policy meeting on November 9, after deciding to keep the reference rate unchanged in October. So far, the BCRP has delivered a moderate easing cycle (three 25-bp cuts since May 2017). The monthly statement still features an easing bias, although the wording is not so straightforward anymore. With annual inflation posting a big downward surprise in October (decreasing to 2%, from 2.9% in September), with likely effects in inflation expectations, we believe the board will seize the opportunity to deliver the last 25-bp rate cut of its easing cycle, taking the reference rate to 3.25%. Nevertheless, we highlight that the central bank seems much more optimistic about activity. Therefore, there is a non-negligible possibility that the board will refrain from cutting rates, featuring more upbeat wording on activity and removing the easing bias from the statement.


4. Calendar of monetary policy decisions in November

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