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Global Monetary Policy Monitor

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Expansionary Trend Continued in February

March 5, 2015

Six central banks cut their benchmark interest rates. Four of them surprised market expectations.

Monetary policy decisions were made in 16 countries (or regions, such as the euro zone and the UK) under our coverage. Six central banks cut their benchmark interest rates – China, Turkey, Indonesia, Israel, Sweden and Australia. Four of them surprised market expectations. Furthermore, India and Peru reduced reserve requirements. No country increased interest rates.

Monetary policy trends are mixed in Latin America. In addition to lower reserve requirements in Peru, Colombia is set to cut its benchmark rate soon, in response to slowing economic activity. In Chile, recent inflation figures are making the central bank more cautious, so that we continue to forecast interest rates on hold during our forecast horizon. In Brazil, recent currency depreciation and pressure on current inflation from higher regulated prices will probably require a tougher monetary policy stance. There were no COPOM meetings in February. In the beginning of March, COPOM raised the Selic rate by 50 bps.

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 rate.

2. Charts

3. Monetary policy in LatAm

BRAZIL: Copom: the tightening cycle continues

There were no monetary policy decisions in February. At the beginning of March, the Copom continued the tightening cycle and raised again the Selic rate by 50 bps, to 12.75. The decision was unanimous, and in line with expectations, which in large part (including ours) were revised in the past couple of weeks.

The brief post-meeting statement was the same of the last meeting, leaving the door open for both another 50-bps hike, or a reduction in the pace of hikes to  25-bps in the next Copom meeting.

“Evaluating the macroeconomic scenario and inflation prospects, the Copom decided unanimously to raise the Selic rate by 50 bps to 12.75%, without bias.”

The recent exchange rate depreciation (12% year to date) puts additional short-term pressure on inflation, which is already high due to the regulated price adjustments.

In this context, the monetary policy response tends to be stronger in order to dissipate the short-term pressures and avoid pressuring inflation expectations. Thus, the Copom opted to keep the pace of monetary adjustment tonight.

Going forward, the more conservative monetary policy stance this year, the fiscal adjustment announced by the government and the front-loaded increase in regulated prices in 2015 tend to open room for lower inflation starting in 2016. In this scenario, we believe the Copom will not extend the hiking tightening for much longer. 

We maintain our projection that the Copom will increase the Selic by 25 bps in April, ending the cycle with the Selic rate at 13%.

MEXICO: Following the Fed?

The minutes of the most recent monetary policy committee meeting in Mexico revealed a unanimous decision to leave the policy rate unchanged, at 3.0%. As in the statement announcing the decision, the minutes showed that most of the committee members see the balance of risks to inflation unchanged, even though they also see a deterioration in the balance of risks for activity. Board members again sounded concerned with the evolution of the exchange-rate, in spite of making the usual disclaimer that the pass-through in Mexico has been historically low.

The document indicates that rate cuts are clearly off the table and the debate is when to hike. In that sense, one board member explicitly called for rate hikes before the Fed moves. Another member said that a monetary policy reaction in anticipation to “an external shock” can’t be ruled out. A third member did not hint at imminent moves, though also leaving it clear that the next move will be a hike: he mentioned that the drop of inflation was already tightening monetary conditions, while affirming that this is a first step and that there was no room for additional easing. On the other hand, one board member said that the central bank should guide its actions by the convergence of inflation to the target and by anchoring inflation expectations, rather than by the Fed’s actions.

Soon after the minutes were published, Governor Carstens stated that rate increases in Mexico could come before the Fed starts to raise rates. 

We currently expect Mexico’s central bank to deliver an interest rate hike in June, together with the start of the tightening cycle of the Fed. In our view, the well-behaved inflation, the slower-than-expected recovery and the fact that the pass-through in Mexico has been low decrease the odds that Mexico’s central bank raises rates before the Fed. Furthermore, considering that we see a greater probability that the Fed will start its own tightening cycle only in September, the possibility that Mexico’s first move comes in that month is also on the rise.  

CHILE: Same tone, same rate

In its February Monetary Policy Meeting, the Central Bank of Chile left its reference interest rate unchanged at 3.0%, as widely expected. The press statement announcing the decision maintained a neutral tone. The minutes of the meeting revealed that the decision was unanimous, and that the option of leaving the rate unchanged at 3.0% was the only “relevant” one.

The research staff believed that rate cuts would be inconsistent with the higher than expected inflation in January and with activity that continued to evolve in line with the latest Monetary Policy Report (IPoM) scenario. On the other hand, the observed inflation was not viewed as a threat to target convergence, and the medium term risks to growth remained largely downward biased. In that sense, raising the policy rate was not deemed appropriate either.

One board member indicated that if the inflation rate remains above the target for a longer period than anticipated, a tighter monetary policy could be required. However, other members were more “neutral”.

Under our expected scenario for activity and inflation, we see the central bank maintaining the policy rate at 3.0% throughout this year and the next. In our view, the central bank is clearly comfortable with the current amount of monetary stimulus in the economy and it will likely avoid adding liquidity amid interest rate increases in the U.S., especially considering the high levels of underlying inflation measures. We expect our view to be confirmed in forthcoming IPoM.

COLOMBIA: Interest rate on hold for now

The central bank held the policy rate at 4.5%, as was widely expected, in its February meeting. At the press conference, Governor Uribe informed that the decision was unanimous. 

Importantly, board members sounded less concerned over the behavior of inflation expectations, as the statement highlighted that both surveyed expectations and breakeven inflation fell (although the latter is in the upper part of the target band). Our take is that the central bank is more confident that there will be only a transitory impact of the weaker exchange-rate on prices. While the board highlighted the dynamism of internal demand at the end of the year, amid a closed output gap, concerns over the impact that lower oil prices will have on growth remains. So, the central bank reiterated its latest growth forecasts after the sharp downward adjustments made last month.

All in all, the tone of Colombia’s central bank is gradually softening. As the slowdown consolidates and it becomes clear that the depreciation of the peso is not leading to second round effects, monetary easing is likely. We believe that the central bank will implement two 25 b.p. rate cuts in 2Q15. 

PERU: More liquidity through reserve requirements

Peru’s central bank held the policy rate at 3.25%, as expected, in its February meeting. This follows the surprise decision to implement a 25 b.p. rate cut in the previous meeting. The board continues to maintain its easing bias by expressing that it would monitor inflation expectations and its determinants in order to, if necessary, implement additional easing measures. 

In fact, the central bank has implemented additional monetary easing by lowering the reserve requirement for local currency (to 8.0% from 8.5%), effective from the beginning of March. The central bank also lowered the lenders’ minimum deposit requirement to 1% from 1.5%. Leading up to the move, Governor Velarde noted that the reserve requirement rate for local currency could see further decreases (so the decision is not unexpected). Yet, he indicated that the rate is near the operating limit for banks, meaning that additional cuts would be less effective.

We expect a final interest rate cut in 2Q15, to 3%. The interest rate will likely stay at that level thereafter.


4. Calendar of monetary policy decisions in March


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