Itaú BBA - Expansionary bias globally, Latin America still on the opposite track

Global Monetary Policy Monitor

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Expansionary bias globally, Latin America still on the opposite track

March 2, 2016

Global monetary policy has become more expansionary since the start of the year, Latin America continues on the opposite track.

Global monetary policy has become more expansionary since the start of the year, in response to increasing risk aversion in financial markets and the risk of a decline in growth and in commodity prices. In February, Sweden and Indonesia cut interest rates, while China reduced the reserve requirement ratio. In an official statement, G20 members emphasized that “monetary policies will continue to support economic activity and ensure price stability” but “monetary policy alone cannot lead to balanced growth” and should be supported by fiscal policy.

Latin America continues on the opposite track. Last month, Colombia, Peru and Mexico raised interest rates (Mexico’s decision was taken in an extraordinary meeting). We expect further interest rate increases in Latin American countries, although global conditions are pushing in the opposite direction. In Brazil, monetary conditions are already tight and the recession is growing deeper. We expect the BCB to keep interest rates steady in the short term, and to start cutting them toward the end of the year.

In March, all eyes will be back on the central banks in advanced economies. The Fed is likely to wait a while longer before it resumes its cycle of rate increases. There are concerns that market volatility could result in tighter financial conditions and affect the economic outlook. The ECB is likely to implement further stimulus by, for example, extending its asset-purchasing program. Finally, the BoJ will monitor the effects of the negative interest rate decision made at its last meeting.


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: No room for change in the next meeting

There was no monetary policy decision in Brazil in February. Throughout the month, members of the Central Bank Monetary Policy Committee (COPOM) reinforced the signals from the January minutes regarding higher external uncertainties. However, they emphasized that in the inflation convergence scenario, “there is no room for monetary easing” as the balance of risks for inflation remains unfavorable, with inflationary expectations still under pressure. Furthermore, their speeches reinforced the need for a fiscal adjustment to improve the forward-looking inflationary scenario.

We expect that the Selic rate will be held at 14.25% in March meeting. Looking ahead, we believe that the BCB will hold the Selic rate at this level until the July meeting, given the high level of current inflation, but will start to reduce rates at the end of this year. In our assessment, the unemployment rate will continue to rise, and Central Bank projections will likely point to a deeper recession this year. As the 12-month inflation measure starts to fall and seasonal inflationary pressures from foodstuffs dissipate, we understand the BCB will start cutting interest rates. We therefore believe that the Selic rate will end 2016 at 12.75%, with three 50bps cuts starting in August.

We believe that the main risk to this scenario is a more intense depreciation of the exchange rate. There are substantial risks both external (global deceleration) and domestic (fiscal) which could cause a lager depreciation of the Brazilian real, putting pressure on inflation. In this alternative scenario, we believe that the Copom would not see room for rate cuts.

CHILE – Heightened concern with the external scenario

The central bank’s decision to leave the policy rate unchanged at 3.50% was a unanimous one and of no surprise to the market. It was the second consecutive month the monetary authority left the reference rate unaltered, following what so far has been a short and discontinuous tightening cycle that began in October 2015. The options of hiking the policy rate and leaving it unchanged were both considered viable options by the board, but the latter was deemed more appropriate given the increased uncertainty in the global economy and downside risks to domestic activity.

The board raised concerns over the recent developments in the global economy, with one board member noting that their potential impacts on the Chilean economy should be the main focus of the 1Q16 Monetary Policy Report (IPoM). Another member stated that, compared to the 4Q15 IPoM, the global growth outlook had worsened, while financial conditions became tighter. One board member highlighted increased concern with the evolution of activity in the United States, as well as the state of the Chinese economy and the effectiveness of policies implemented by its authorities.

We expect two additional rate hikes - between 2Q16 and 3Q16. However, we acknowledge that given the uncertain outlook for global growth, the weak activity readings, well-anchored inflation expectations and the relief to inflation expected from the recent stabilization of the exchange-rate, the risks are for no further hikes this year.

COLOMBIA - Keep tightening 

In line with market expectations, the central bank increased the policy rate by 25-basis points to 6.25%. The policy rate increased by a total of 175 bps since the tightening cycle began in September 2016. Inflation accelerated beyond staff estimates to 7.5% year over year in January (6.8% previously) and inflation expectations remain elevated. This is the fifth consecutive split decision (some board members are voting for a 50-bp increase), as revealed by Governor Uribe in the press conference.

Additionally, the board decided to lower the FX intervention threshold to 3% above the 20-day moving average. The central bank is aiming to contain the depreciation of the currency amid elevated volatility in international markets. When the mechanism was announced in October, this threshold was set at 7% and then it was lowered to 5% in December. So far, the central bank has not intervened.

We continue to see no signs that the board intends to bring the tightening cycle to an end in the near-term. The board reiterated that the most recent decision was a “continuation” of the path of 25-bp hikes to ensure that inflation converges to the target range in 2017. Although our baseline scenario considers one final 25bps rate hike in March, there is a growing risk of more tightening than we currently expect.

PERU - Continuous hiking cycle 

As widely expected, the central bank of Peru increased its policy rate by 25 basis points to 4.25%. It was the third consecutive rate hike and the fourth in a tightening cycle that started in September last year. The press release retained a tightening bias.

Rising inflation and high inflation expectations were the key factors behind the latest hike. The central bank highlights the possible feedback effect that high inflation expectations could have on future inflation. In fact, the central bank’s latest survey shows that analysts’ inflation expectations for 2016 remain above the 1%-3% target range, while those for 2017 sit on the 3% upper bound. Firmer economic growth in the 4Q15 also encouraged the central bank to raise the policy rate. In our view, the evolution of the exchange-rate is also behind the decision to hike.

We anticipate an additional 25-bp hike in the first half of this year, ending the tightening cycle. However, with inflation expectations remaining elevated and showing no sign of retreating, there is a growing risk that the central bank extends its tightening cycle beyond our baseline scenario. Following this decision, the central bank also raised the PEN reserve ratio, the first time since 2013, to 1% from 0.75% as a further measure to ensure inflation convergence.

MEXICO - A Strong Response 

As a response to the deterioration of Mexican asset prices, policy makers announced a coordinated action to improve the sentiment with the exchange-rate and the sovereign risk. The policy rate was unanimously raised by 50 bps (to 3.75%) at a surprise meeting of the board of governors and the government announced expenditure cuts amounting to 0.7% of GDP (with around 75% of these cuts effected in Pemex expenditures).

In addition, interventions will be less predictable. Shortly before the fiscal and monetary policy announcements, Mexico’s central bank carried out a discretionary sale of dollars in the market (that is, dollars were sold outside the auctions that have a minimum price). Later, it was revealed that the sale amounted to USD 2.0 billion. In another press statement, the foreign exchange commission (made up of members of the central bank and the Ministry of Finance) announced a suspension of the minimum-price auctions, but it added that it can still carry out discretionary sales under exceptional circumstances. Speaking to the press, Governor Carstens clarified that the central bank will no longer update dollar sales daily (but the amount sold will continue to be disclosed together with weekly change in international reserves).

Mexico has a lot of room to act to contain the depreciation of the peso. Reserves stand at around USD 174 billion and the country has a standby credit line with the IMF worth USD 65 billion. Also, real interest rates remain low, even after the surprise hike, so there is still monetary stimulus to be removed. Now that authorities have signaled that they are willing to use at least part of this firepower (and also considering the strong fundamentals of the country) it will be far more risky to short the Mexican peso. In fact, the Mexican peso was the best performing currency since the measures were announced.

According to the press statement announcing the surprise 50-bp rate hike decision, the move does not mean the beginning of a tightening cycle and the central bank will not necessarily raise rates again at its next regular meeting (scheduled for March). Still, the central bank continues to highlight the evolution of the exchange-rate as the key variable to watch for future policy moves. The interest-rate differential with the U.S. also continues as a relevant input for the next decisions.


4. Calendar of monetary policy decisions in March




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