Itaú BBA - Few Changes, Mostly Expansionary

Global Monetary Policy Monitor

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Few Changes, Mostly Expansionary

March 10, 2014

Monetary policy decisions were made in 20 countries under our coverage in February.

Monetary policy decisions were made in 20 countries under our coverage in February. Four nations changed their benchmark interest rates. Hungary and Chile extended the easing cycles started last year, while Israel cut rates again after six months of stability. Peru slashed its reserve requirement to 13% from 14%, which is the same as easing monetary conditions. Brazil was the only country to increase interest rates, although the central bank opted to slow down the hiking pace (to 25 bps from 50 bps).

Lower volatility in international markets probably influenced these decisions. Looking ahead, conditions may not be as favorable. Improvement in U.S. growth figures may pressure yields in that part of the world and reverse the peaceful scenario for emerging markets. Slower growth, particularly in Chile and Brazil, was also behind these less conservative decisions.

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: A New Pace, for the Time Being

The Brazilian Central Bank’s monetary policy committee (Copom) raised in February the benchmark Selic rate by 25 basis points to 10.75%. The decision to reduce the pace of rate hikes (from 50 bps in previous meetings) was unanimous and in line with our expectation.

Lower volatility in international markets was probably an important factor behind the decision to reduce the pace of rate increases. Additionally, economic activity continues to show signs of weakness, with declining business and consumer confidence levels and still-high industrial inventories. Last week’s announcement of the fiscal target for 2014 and lower-than-expected current inflation likely weighed on Copom’s decision as well.

The post-meeting statement was similar to the one released after the previous meeting, with the only difference being the withdrawal of the expression “at this moment,” signaling, in our view, that the tightening cycle tends to continue. In the minutes, published one week later, the Copom reinforced the sign by saying that it “considers it appropriate to continue the ongoing adjustment pace of monetary conditions”

However, there are already indications that the Copom may end the cycle in the not-so-distant future. There was one important change in the description of the domestic scenario in relation to the minutes of the previous meeting. The committee stated that demand (absorption) and supply (output) showed growth rates that “are gradually converging,” likely indicating that the adjustment in monetary policy already induces economic rebalancing (paragraph 21). Apart from that, the outlook is for a “relatively stable expansion of domestic activity this year.”

Inflation forecasts suggest improvement ahead. Compared with the minutes of the previous meeting, estimates for 2015 declined in the reference scenario (with constant interest rates and exchange rates) and remained unchanged in the market’s scenario. Importantly, however, inflation forecasts for 2014 and 2015 remain above the target center in both scenarios. Furthermore, in the market’s scenario (the median estimate for interest rates and exchange rates by market analysts), the estimate for 2014 increased, although it remained stable in the reference scenario.

Externally, the committee continues to see moderation in the dynamics of commodity prices (“even considering localized pressures”), which removes a material source of inflationary pressure.

Maybe the most important sign in the minutes is the inclusion of a comment arguing that the effects of monetary policy actions “are cumulative and materialize after a lag” (paragraph 31). We read this comment by the Copom as an indication that the cycle won’t likely be extended much further.

Recent communication from the Copom is consistent with our scenario of an additional 25-bp increase in April, with the Selic rate remaining stable, at 11% until the end of 2014. In 2015, the Copom should feel the need for an additional adjustment, driving the rate to 12%.

Mexico - Concerns Over Inflation Will Likely Ease

In its latest monetary policy meeting (held by the end of January), the central bank kept a neutral bias but raised concerns over inflation. According to the press statement announcing the decision, the board saw a worse balance of risks for inflation, due to the potential second-round effects of the high headline inflation (the latest data point for inflation available at the time of the meeting was 4.6% year over year) and to global market volatility. At the same time, the board said that the balance of risks for activity improved. Since the last meeting, a number of weak activity indicators were published and inflation retreated substantially, with the core measure back to the center of the target. So, data do not support rate hikes. On the other hand, the central bank already recently signaled that it would be unwilling to bring the short-term (ex ante) real interest rate to negative. In our view rate cuts will not return to the table unless the outlook for activity deteriorates much further. 

However, a tightening cycle is likely in 2015, as the output gap narrows and the U.S. starts to raise interest rates. We expect the central bank to bring the policy rate to 4.5% before the end of 2015.  

Chile - An Expected Rate Cut and Likely Additional Easing Ahead

The Chilean Central Bank lowered the policy rate by 25 bps to 4.25% in February. The cut was widely expected. Market players were therefore more anxious for guidance on future policy moves.

In the concluding remarks of the press statement which accompanied the decision, the board repeated the wording introduced at the previous policy decision, where “greater monetary stimulus will likely be necessary within the next few months to ensure that inflation remains at 3% in the relevant monetary policy horizon”, suggesting that a rate cut in March became very likely.

In the minutes of the meeting it was revealed that the decision to reduce the rate was unanimous, but the board also considered maintaining the policy rate unchanged as a “relevant option.”  However, the central bank decided to reduce the interest rate because this decision would be consistent with the scenario outlined in its December monetary policy report and because recent indicators show that the economy is slowing further, after many quarters of below-trend growth.

Furthermore, board member Joaquin Vial gave an interview to a local newspaper where he stated that more rate cuts could come. He noted that the current level of the exchange-rate is within the range consistent with the long term fundamentals, signaling that the recent depreciation wouldn’t be an issue in continuing with the easing cycle.

We expect the central bank to reduce the interest rate by 25 bps (to 4.0%) in the next monetary policy meeting (to be held on March 13) and we see the policy rate ending this year at 3.5%.

Peru - No Rate Change, but an Additional Reserve Requirement Rate Reduction

The central bank left the interest rate unchanged at 4.0%, matching both our expectation and market consensus. Once again, the press release stated that this decision was consistent with an inflation forecast of 2.0% within the next two years. Still, in the short-term the central bank expects inflation to remain close to the upper limit of the range.

Regarding activity, the central bank expects the recovery to continue in the first quarter of this year. Finally, the board mentioned that it would consider further policy loosening, signaling that an easing bias still remains.

Meanwhile, the central bank continues to ease monetary policy through macro-prudential measures. In February the central bank lowered the domestic currency reserve requirement rate for the third consecutive month to 13% (from 14%). The willingness to avoid exchange-rate volatility is leading the central bank to prevent the narrowing of the interest-rate differential. In addition, the central bank is also intervening in the foreign exchange market to protect the Peruvian sol. In February, the bank sold USD 430 million, although no intervention was made after February 5. The sol has gradually returned to 2.8 soles per dollar by the end of February, after peaking this year at 2.825 on February 5.

In our view, the central bank will not change the policy rate this year.

Colombia - Rate and Bias Remain Unaltered

The central bank acted in line with the overall market expectation in February by maintaining the interest rate at 3.25%.   

In the press release announcing the decision, the board revealed that it was still confident of a recovery this year, even slightly more optimistic regarding economic growth expectations compared to in its previous meeting, as there was a small increase in the 4Q13 GDP forecast from 4.5% to 4.6%. Board members still expect a recovery in 2014, as it left the GDP estimate unchanged at 4.3%.

The last two paragraphs of the press release were identical, confirming that the neutral bias still holds. Once again, the central bank highlighted that the current expansionary monetary conditions will aid inflation´s convergence to its 3.0% target, as the output gap narrows. We expect the interest rate will be left unchanged in the next few months.

4. Calendar of monetary policy decisions in March

      * Source: Bloomberg


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