Itaú BBA - Expansionary Bias in September

Global Monetary Policy Monitor

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Expansionary Bias in September

October 6, 2014

Monetary policy decisions took place in 27 countries (or regions) in our coverage in September.

Monetary policy decisions took place in 27 countries (or regions) in our coverage in September. Benchmark interest rates were reduced in Chile, Peru and the Eurozone. In the latter, the central bank also announced purchases of private sector assets. In the tightening side, just the Philippines raised rates, to 4.0%. Other countries which had been hiking rates, such as Colombia, New Zealand and South Africa, opted to keep them stable.

The economic slowdown in most emerging countries and in the Eurozone explains these more expansionary moves, expressed through rate cuts or interruption in hiking cycles. However, the streingheing trend in the U.S. dollar in recent months may require tightening in a few nations. In Brazil, for instance, we expect a stable Selic rate ahead, but we see an upward bias if the depreciation trend in the real is sustained.

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: Copom signals stable Selic, but the exchange rate is a risk

The central bank’s Monetary Policy Committee (Copom) kept the Selic rate at 11% in its September meeting, and continued to signal stable rates ahead. In the minutes of the meeting and in its Quarterly Inflation Report (IR), the Copom repeated that “if monetary conditions are maintained – that means, the strategy that does not include the reduction of the monetary policy instrument – inflation tends to enter in a trajectory of convergence to its target in the final quarters of the projection horizon.”

The Copom made it clear that the options are to keep or to raise the Selic rate. In an interview following the IR publication, Deputy Governor for Economic Policy Carlos Hamilton stated that Copom is currently considering whether to keep or to raise the Selic rate. According to Hamilton, the monetary policy will be adjusted in a timely fashion, if the inflationary outlook so demands.

We expect a stable Selic rate ahead, but the exchange-rate dynamics are a risk. We maintain our forecast that the Selic will remain stable at 11.0% until the end of this year. For 2015, the scenario is more uncertain. The realignment of administered prices and, most of all, the ongoing depreciation of the exchange rate, may demand additional tightening of monetary policy, even in a low growth environment.

Thus, the weaker BRL trend, if intensified and maintained in the medium term, induces an upward bias to our forecast of the Selic rate remaining steady at 11.0% in 2015.

Mexico: No rate hikes in the near term

As expected, Mexico’s central bank left the policy rate unchanged at 3.0% in September. The minutes of the meeting hinted that interest rates will likely stay on hold for a while, even though the board is much more optimistic on growth. The document revealed that the decision was unanimous. Most of the members see an improved balance of risks for activity. Still, in the board’s view, the output gap remains negative, which means that demand-side inflationary pressures are unlikely in the near future. So, the central bank remains comfortable with the inflation outlook for the medium term. However, due to transitory factors (higher livestock prices), there is a worse balance of risks for inflation in the short term, according to the minutes.

Our year-end forecasts for the policy rate are unchanged, at 3.0% in 2014 and 3.5% in 2015. In our scenario, activity will probably grow above potential over the next quarters, but we also think that there is enough spare capacity to keep inflation under control. The central bank will probably preemptively remove the monetary stimulus, but it is unlikely to start doing so before the Fed. Therefore we see rate hikes starting only by the end of 2Q15. 

Chile: Board opts for flexibility as easing cycle draws to a close

As expected, the Chilean central bank cut the policy rate by 25 bps to 3.25% in September. In the press statement announcing the decision, the board kept an easing bias, but expressed it with different wording. The board now says that it “will evaluate the possibility of introducing a further monetary stimulus according to the evolution of the internal and external macroeconomic conditions and its implications on the inflation outlook.” So the board is no longer talking about the possibility of “additional rate cuts” (plural), hinting that the easing cycle is about to end.

Consistent with the message of the statement, the minutes of the meeting revealed that board members agreed on signaling that the end of the easing cycle is near. The board also considered a 50-bp rate cut as a “relevant” option. However, board members did not sound enthusiastic about increasing the pace of rate cuts. The minutes explained that the option of a 50-bp rate cut, if implemented, would also need to be accompanied by a change in the bias from “easing” to “neutral.” This would be necessary because the economic scenario had not changed significantly from that in the September monetary policy report, which had incorporated a policy path ending at 3.0% (or at most 2.75%). But the board felt that reducing the policy rate more than expected while removing the easing bias could confuse markets. In addition, board members did not sound comfortable with giving a strong signal that the easing cycle is over, when, as yet, there are no clear signs of an economic rebound.

We expect one further 25-bp rate cut to 3.0% in October, with the rate remaining at 3.0% throughout 2015. However, the tone of the minutes (in particular, the unwillingness to move the bias to “neutral” now and the view that high inflation is transitory) suggests to us that the board would resume the easing cycle if the recovery expected (by the market and by the central bank) fails to materialize.

Colombia: No more hikes this year

The Colombia central bank decided to leave the policy rate at 4.5% in its September meeting, as expected by us and most market participants. The policy rate decision brings to an end the gradual hiking cycle which lasted five months. Speaking to reporters, Governor Uribe indicated that it was not a unanimous decision to hold the policy rate unchanged.

The central bank noted in its press statement announcing the decision that the 4.3% year-over-year GDP growth recorded in 2Q14 was in line with its expectations, while household consumption grew faster than anticipated. In coming to its decision, the board noted that the economy was growing close to its potential with anchored inflation expectations, amid lower terms of trade and growing uncertainty both over the global economic recovery and over external financing costs.

We expect no further rate moves this year (year-end rate of 4.5%). In 2015, we expect less aggressive rate hikes than previously anticipated. As a result of our lower GDP growth forecasts, we now expect the interest rate to end 2015 at 5.0% (5.5% previously).  

Peru: Further monetary policy easing

Peru’s central bank cut the policy rate by 25 bps, to 3.50%, as expected by us and most market participants. Weaker-than-expected GDP growth and moderating inflationary pressures influenced the rate cut decision. The press statement announcing the decision said explicitly that this rate cut should not be taken as a signal that a sequence of additional cuts would follow. This same message was conveyed when the central bank cut the policy rate in July. In an additional easing move, the central bank lowered the reserve requirements for local currency, to 10.5%, effective from the start of October, from 11%.

We expect further monetary policy easing. Considering the weak economy and the moderation of inflation, we expect the central bank to implement additional monetary easing through its more traditional instrument (the policy rate) and through reserve requirements. However, financial market volatility will have to subside before the interest rate can be cut again. We currently expect the interest rate to end this year at 3.25% (implying one additional 25-bp rate cut), with no rate moves in 2015.

Meanwhile, the central bank sold U.S. dollars in the spot market for the first time in seven months. Ahead of the first spot market sale, central bank president Julio Velarde noted that the central bank would intervene in the currency market by selling dollars if the measure were needed to strengthen the sol. These spot sales come in addition to the issuance of dollar-linked certificates of deposit, another instrument that the central bank has already been using. Finally, the central bank also announced a FX swap program (non-deliverable), to reduce exchange rate volatility if needed.

4. Calendar of monetary policy decisions in October

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