Itaú BBA - Few movement in May, still expansionary

Global Monetary Policy Monitor

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Few movement in May, still expansionary

June 2, 2015

In May, 17 of the countries we cover announced monetary policy decisions. Only 2 of them changed their monetary policy.

Seventeen of the 31 countries (or regions) we cover announced monetary policy decisions in May. Only two countries changed their monetary policy, both expansionary and in line with market expectations: China reduced its monetary rate by 0.25 pp and Hungary by 0.15 pp. The number of central banks that have added monetary stimulus has fallen in recent months. The stabilization of oil prices caused a decline in the downside risk for inflation, which in turn reduced the room (or need) for additional stimulus.

The monetary policy in Latin America maintains a tightening bias. The Brazilian Central Bank has been signaling another hike in the SELIC rate in June. In the region’s other countries, central banks have signaled that there is no room for cuts. However, central banks considering interest-rate hikes (such as Chile and Mexico) have made it clear that the tightening cycle will not be carried out in the very short term.

1. Policy rates: Historical table

*Blank places mean absence of monetary policy decision for the month.

** Numbers in red indicate rate cuts, in green indicate rate hikes and in grey indicate another monetary policy change different from interest rates.



2. Charts

3. Monetary policy in LatAm

BRAZIL: Copom: Same message, same pace

There was no monetary policy decision in Brazil in May. In its April meeting, the Copom increased the Selic rate by 0.50 p.p., to 13.25%

The Copom has been signaling that it will “remain vigilant,” aiming to bring inflation to 4.5% by year-end 2016 through “determination and perseverance. In a speech at the BCB’s annual inflation targeting seminar, Central Bank Governor Alexandre Tombini emphasized the bank’s intention to ensure the convergence of inflation toward the 4.5% target by the end of 2016, through “determination and perseverance." Tombini repeated that "monetary policy efforts still have not proven sufficient,” adding that the Copom "has been, is, and will remain vigilant." Deputy Governor Luiz Awazu Pereira used the same wording at a recent BCB event. In our view, these are signs that the Copom intends to maintain the current rate-hiking pace at its June meeting.

Thus, we expect the tightening cycle to continue in June, with an addition 50-bp hike in the Selic rate. Looking forward, we believe that economic activity will continue to lose strength due to a weak the labor market and low business and consumer confidence. Thus, we believe the Copom will probably end the hiking cycle after the June hike, at a Selic rate of 13.75%.

MEXICO: Lower probability of a hike before the Fed

The minutes of the April meeting revealed a unanimous decision to leave the policy rate unchanged, at 3.0%. The document showed that most of the committee members see both the balance of risks to inflation and activity unchanged from the previous meeting.

Importantly, most of the board members concurred that hiking before the Fed would bring more costs than benefits. In the minutes of the previous meeting, only two members were clearly against hiking before the Fed. Instead of raising rates, the majority of members seem willing to intervene more in the currency market should exchange-rate volatility increases meaningfully in anticipation to the Fed’s liftoff. In contrast, two members build a case for hiking before the Fed.

We expect the central bank to raise rates in September, together with the Fed’s liftoff. The recent communication of the central bank suggests that rate hikes before the Fed’s initial interest rate increase are less likely. Furthermore, we can’t rule out that - considering the low inflation readings and the weak economic recovery in Mexico - the central bank decides to hike only months after the Fed does.

CHILE: No rate hikes soon

For the seventh month in a row, the central bank decided to leave its reference interest rate unchanged at 3%, as expected by us and market participants. The minutes of the meeting revealed that the decision, considered the only relevant option, was unanimous and a neutral tone was maintained (meaning that rate moves within the next few meetings are unlikely in the board’s view). The higher-than-expected inflation in April did not change the central bank’s mindset. Board members continue to rule out rate cuts, but they remain comfortable with the interest rate path estimated in the 1Q15 IPoM, in which monetary policy normalization should start to be examined only by the end of this year or early next year.

When debating the interest rate decision, two board members sounded more cautious than the rest. One of them pointed out that an economic recovery was anticipated once confidence rebounds. However, he doubted the possibility of Chile growing between 4.0% and 4.5% without creating external imbalances or inflationary pressures, drawing further attention to the uncertainty over the amount of slack in the economy and the need to carefully revise the bank’s estimation of the output gap and its evolution ahead. Another member saw more merit in raising the policy rate than in the previous meeting, although at the end he agreed with the rest of the board’s view on bias and rates.  

Considering our scenario of a gradual recovery of activity and gradual convergence of inflation, we do not expect any rate moves this year or in 2016. However, if inflation proves to be more sticky than we and the central bank expect, rate hikes are likely and could even come before the guidance that the central bank is providing for monetary policy normalization.  

COLOMBIA: No signs of rate movements in the near future

As expected by us and all 31 of Bloomberg’s surveyed analysts, the central bank held the policy rate at 4.5% in its monthly meeting. The decision was unanimous and is the ninth consecutive meeting that the board has stayed on hold. Overall, a neutral tone was maintained.

In the press release announcing the decision, the board highlighted the higher-than-expected inflation increase in April (to 4.64% from 4.56% a month before) and noted that the expectations for December 2015 are now sitting at 3.92% (3.76% last month).  It also made reference to the relatively stable yearend 2016 expectations, which are close to 3.0%. The board continues to see inflation’s acceleration driven primarily by transitory factors (in particular due to food prices and, to a lesser extent, the exchange rate pass-through). In the press conference, Governor Uribe suggested that the current policy rate is providing a moderate stimulus to the economy.

Overall, we see the central bank remaining on hold for the remainder of 2015 and throughout next year. Apart from high inflation, the wide-current account deficit (expected to reach 6.0% of GDP this year from 5.2% in 2014) deters any additional monetary stimulus being implemented. Alternatively, with activity continuing to show signs of decelerating (the central bank recently cut its 2015 GDP growth forecast to 3.2%, in line with Itaú),  the chances of rate hikes are low in our view.

PERU: Monetary easing continues, but only through reserve requirements

Peru’s central bank held the policy rate at 3.25%, as expected, in its May meeting. This is the fourth consecutive meeting at which the board has stayed on-hold. The board retained a neutral tone. The current interest rate level was deemed compatible with the expectation that inflation would converge to the 2.0% target in the 2015-2016 horizon. However, the central bank continues to implement monetary easing by lowering the reserve requirement rate for local currency (to 6.5% from 7.0%, effective from the start of June). This is a continued attempt to increase liquidity and support credit growth as the economy is yet to rebound from a natural resource-led slowdown last year. The central bank has also lowered its “lender of last resort” rates.

We do not expect any policy-rate moves during the remainder of the year, or throughout next year, but it is possible that the central bank could continue to use reserve requirement cuts to increase liquidity in the economy, without adding pressures for exchange-rate weakening.


4. Calendar of monetary policy decisions in June

 * Source: Bloomberg

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