Itaú BBA - Few Changes, Except for Russia

Global Monetary Policy Monitor

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Few Changes, Except for Russia

January 6, 2015

Monetary policy decisions were made during December in 25 countries or regions that we cover (including the euro zone and the UK).

Monetary policy decisions were made during December in 25 countries or regions that we cover (including the euro zone and the UK). The headline was Russia, that increased its benchmark interest rate by a total of 750 bps, with a 650-bp hike carried out in an extraordinary meeting following a sharp depreciation in the ruble. Only two other moves occurred: Brazil increased the Selic rate by 50 bps, as expected, while Norway surprised the market by reducing its benchmark rate by 25 bps.

Latin America experiences mixed conditions for monetary policy, with an economic slowdown on the one hand and possible inflationary pressures arising from the currency-depreciation trend on the other. In this scenario, countries with unfavorable inflation levels must adopt more austere monetary policies than others. In Brazil, we expect the hiking cycle to end in March, with the Selic rate at 12.50%. We anticipate a small rate increase this year in Mexico, to 3.5% from 3%, which is still consistent with an expansive real interest rate. We also expect a small cut in the benchmark rate in Peru, to 3.25% from 3.5%. We do not forecast any changes in benchmark rates in Chile or Colombia in 2015.

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: “Whatever it takes”, to ensure a declining inflation trend


The Monetary Policy Committee of the Central Bank of Brazil (Copom) accelerated the hiking pace of the Selic rate to 0.50 pp, bringing the interest rate to 11.75% per year, as expected. Despite mentioning in the minutes that it would implement the additional effort “parsimoniously,” in the inflation report (IR) released the following week, the Copom stated it “will do whatever it takes so that next year inflation enters a long period of decline, taking it to its 4.5% target in 2016”.

Despite the indication that the Copom will do “whatever it takes” for inflation to reach 4.5% in 2016, which theoretically would require a more significant adjustment in the Selic rate, we don’t believe that the Copom’s base-case scenario contemplates a more intense or prolonged tightening cycle than we currently expect. We anticipate an adjustment in interest rates which takes inflation to a downward path in coming years. In fact, inflation forecasts in the IR already show a declining path, nearing 4.5% in 2016. Additionally, the Copom revised downward its growth estimate for 2015, and still contemplates the possibility of a more restrictive stance in fiscal policy than its base-case scenario.

We believe that the Copom’s indications are compatible with our scenario of a 0.50-pp Selic hike in the next meeting, and a final adjustment of 0.25 pp in March, bringing the rate to 12.50%.


MEXICO: More Concern Over the Exchange Rate


The minutes of the December monetary policy meeting 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 a worsening balance of risks for inflation, even though they also see a deterioration in the balance of risks for activity and recognize that there are no demand-side inflationary pressures in the economy, due to a negative output gap.

One member pointed out the upward trend in public debt over the past few years and suggested that Mexico may therefore be more vulnerable to external shocks. He signaled that monetary policy could play a significant role in confronting the current global economic conditions, helping to anchor inflation expectations and limit disorderly movements in the interest rate curve. He went on to say that real interest rates will likely start to increase in the short term, due to lower inflation, dissipating monetary stimulus. If that is not enough, the central bank would need to raise the policy rate. Some other committee members seemed to agree with this assessment, by saying that the development of the international economy have increased the challenges and reduced the margin of action for macro policies in Mexico, so monetary policy should be more precautionary from now on. In our view, this indicates that the debate is now about when to hike, and that exchange-rate volatility may prompt earlier rate increases.

We still see rate hikes starting by the end of 2Q15, in tandem with Fed rate hikes, but we acknowledge that global volatility together with the ongoing recovery of the U.S. (and its impact on Mexico’s economy) might lead to an earlier initial hike by Mexico’s central bank.


CHILE: Rates on Hold in December; Neutral Tone 


The central bank unanimously held the interest rate at 3.0% in December, as expected by us and the market. The press release announcing the decision maintained a neutral tone, and the minutes revealed that, like the decision in November, keeping the interest rate unchanged was the only significant option considered by the board.

Also in December, the central bank published the 4Q14 monetary policy report. In this document, the central bank decreased the growth-rate forecasts for both 2014 and 2015 with respect to its September report. In particular, the growth rate is now estimated at 1.7% for 2014 (previous: 1.75%-2.25%) and 2.5%-3.5% for 2015 (previous: 3.0%-4.0%). In spite of the revisions for oil prices, the inflation expectation for December 2014 is now 4.8% (4.1% in September) mainly due to higher-than-expected numbers in the past few months, while the 2015 year-end forecast remained at 2.8% (same as previously). Importantly, the central bank assumes in its baseline scenario that the monetary policy rate will stay “stable in the short term.” In our view, the central bank’s use of “the short term” suggests that it is not disagreeing with the current market expectations of additional cuts (according to surveys and the interest-rate curve), while at the same time it is not validating them. 

We expect the central bank to remain on hold throughout 2015. However, we acknowledge that the possibility of further rate cuts is greater than that of rate hikes. As activity has shown no signs of a meaningful recovery, confidence levels have yet to rebound and inflation is likely to decelerate quickly; the macroeconomic scenario is likely to be more suitable for additional cuts than for a tighter monetary policy.


COLOMBIA: Interest Rate Unanimously Held at 4.5%; Dollar-Purchase Program Discontinued for 1Q15


The central bank of Colombia unanimously decided to hold the interest rate at 4.5% in its December monetary policy meeting. This was expected by Itaú and Bloomberg’s market consensus. Also in this meeting, the board determined that it would not continue with the Foreign Reserve purchase program in 1Q15, which we also expected, based on the recent sharp weakening of the peso. In fact, in 4Q14, the bank purchased USD 458 million, well below the USD 1 billion cap for dollar purchases set for the quarter. 

In the statement announcing the decision, the board used a rationale similar to that adopted in the previous three meetings. It emphasized that internal demand was growing strongly in an economy operating near its full capacity, while inflation expectations are slightly above the target. But, considering the deterioration of terms of trade, the depreciation of the peso and the growing uncertainty about both global economic activity and external borrowing costs, the board found it appropriate to keep the policy rate unchanged. 

The minutes from the meeting confirmed a neutral message. Board members highlighted, on the one hand, that economic growth will most likely slow due to the deterioration of Colombia’s terms of trade and lower global growth. On the other hand, the board acknowledged that the depreciation of the peso will have an impact on the CPI. Although members indicated that the focus will be on potential second-round effects of the depreciation, they mentioned that there is uncertainty over the magnitude of the pass-through and added that a high pass-through could lift inflation expectations.        

We do not expect rate moves in 2015. In addition, if exchange-rate volatility increases further, we think that the bank will probably intervene in the market through options.


PERU: Policy Rate Held, but Reserve Requirements Lowered Once More


Peru’s central bank kept the policy rate at 3.50% in its December meeting. The decision was widely expected. This is the third consecutive month in which the board has remained on hold (after a 25-bp rate cut in September). The Board continues to maintain its easing bias, expressing that it would monitor inflation expectations and its determinants in order to, if necessary, implement additional easing measures.  

We continue to expect additional monetary easing from the central bank, as the Peruvian economy has yet to show meaningful signs of recovering while inflation is expected to moderate towards the 2.0% target. In a period of financial-market volatility, easing in the short term is most likely to come from lowering the reserve requirements (which were recently cut to 9.0% from 9.5%, effective from the start of January). The central bank has been active in the foreign-exchange market to smooth the depreciation of the local currency, by using swap contracts, issuing dollar-linked certificates of deposit and intervening directly in the spot market (in December, the central bank directly sold roughly USD 0.8 billion in the spot market.) However, we still believe that there is space for a further 25-bp cut in the policy rate during 2015 (to end the year at 3.25%), although exchange-rate volatility will need to settle before this is achieved.

4. Calendar of monetary policy decisions in January

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