Itaú BBA - Few surprises in August

Global Monetary Policy Monitor

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Few surprises in August

September 3, 2014

In August, there were monetary policy decisions in 13 of the countries we cover.

In August, there were monetary policy decisions in 13 of the countries we cover. Of these, only Colombia increased its benchmark rate, extending the monetary tightening process that started in April. Chile, Israel and South Korea cut rates by 25 bps each. Israel’s decision was the only out of consensus. Also in the expansionary side, Turkey reduced the upper limit of its interest-rate target range without changing its benchmark rate.

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: Selic at 11% until the end of 2015

There was no monetary policy decision in Brazil in August. In the July’s decision, the Brazilian Central Bank’s monetary policy committee (Copom) left the benchmark Selic interest rate unchanged at 11% p.a. 

In the minutes of the meeting, the Copom stated its view that given “unchanged monetary conditions”, inflation should converge towards the target “in the final quarters of the forecast horizon” (i.e., in 2016). The Copom was explicit, indicating that its strategy “does not contemplate a reduction in the monetary policy instrument”. Therefore, the minutes signaled a stable Selic rate, at 11%.

The Copom’s strategy of stable interest rates is ultimately dependent on the evolution of the economy, particularly the inflation dynamics. In that sense, the two-consecutive-quarters decline in GDP growth and temporarily low monthly inflation readings until August have been prompting some market participants to believe in a rate cut in the coming months.

However, our view is that the inflation outlook for 2015 leaves little room for monetary policy easing. The realignment of regulated prices, the effects of a likely depreciation in the Brazilian real and persistent inflation will likely keep 2015 inflation close to the upper bound of the central bank’s target range (6.5%).

We thus maintain our forecast that the Selic rate will remain at 11% p.a. until the end of 2015.


Mexico: Central Bank in a Neutral Stance

The main monetary policy event last month was the publication of the 2Q14 inflation report. The central bank reduced its growth forecast for 2014, from the 2.3 - 3.3% range to 2.0 - 2.8%. For 2015, the growth forecast was left unchanged, in the 3.2 - 4.2% range. Still, the central bank sees a negative output gap persisting until the end of 2015. Regarding inflation, the central bank did not change much its forecasts, which remain benign. In the bank’s view, headline inflation will likely end this year below 4.0%, while in the beginning of 2015 inflation would fall to a level close to 3.0% (as the impact of this year’s tax hikes fade and gasoline prices are adjusted according to expected inflation) and remain around such level throughout the year.

As in the minutes and press statement of the previous decision, the board expressed comfort with the current monetary policy stance, suggesting that the policy rate is unlikely to move any time soon. In our view, a hiking cycle would take place only by the end of 2015, when the output gap will be tighter and the FED will be in a hiking mode.


Chile: Gradual Easing Cycle Continues

As expected by us and the market, the Chilean central bank cut the policy rate by 25-bps to 3.50%. This follows last month´s unanimous decision to resume the easing cycle. In the press statement announcing the decision, the easing bias was left unchanged as the board said that it “will evaluate the possibility of introducing additional policy rate cuts according to the evolution of the internal and external macroeconomic conditions and its implications on the inflation outlook”.  

The minutes of the decision revealed that divisions within the board are now deeper, even though the board unanimously voted to reduce the policy rate by 25 bps. In the meeting, the board considered three “relevant” options (in contrast to two options, usually): to keep the reference rate unchanged, to reduce it by 25-bps and to reduce it by 50-bps. Four board members saw some appeal in a 50-bp rate cut and none in keeping the policy rate unchanged. Because the board viewed the communication on future policy moves as an important constraint to increasing the pace of rate cuts in August, the guidance in the next monetary policy report is now particularly relevant.   

We currently expect the central bank to deliver another two consecutive 25-bp rate cuts, before ending the easing cycle with a terminal rate of 3.0%. However, considering the recent set of activity indicators, we see significant risks that the central bank will extend the easing cycle further than expected and it may even increase the pace of rate cuts.


Peru: Unchanged Interest Rate, But Lower Reserve Requirements

Peru’s central bank surprisingly left the policy rate unchanged at 3.75% in August. Although the statement announcing the previous decision said explicitly that the rate cut at that meeting was not the beginning of a cycle, we and market consensus thought that the sharp weakening of activity since then would convince board members to reduce the policy rate again last month.

In our view, the rising pressure for exchange-rate depreciation was the key reason behind the decision to stay on-hold. Because the central bank tries to smooth exchange-rate volatility, it avoided reducing the interest rate differential further. In fact, the central bank also announced in August that it will reduce again the reserve requirements for local currency, to 11% (from 11.5%): a bid to help the economy without adding exchange-rate depreciation pressures, in our opinion.    

Still, we continue to expect additional easing through policy rates ahead (we currently see the policy rate at 3.25% by the end of this year). At the end, credit in local currency is already growing strongly and the economy is not responding to it, which will probably lead the central bank to explore other channels of monetary policy than the credit channel.  


Colombia: The Last Rate Hike of the Year?

The Central Bank decided to raise the interest rate by 25-bp to 4.50% in August, in line with both our expectation and the market consensus. This was the fifth consecutive rate hike by the board. In the press statement announcing the decision, the board said that, with this new policy rate level, it expects to keep inflation expectations at the target and growth at its potential, hinting that it is not planning additional rate hikes.  

Judging by recent commentaries from board members, the decision to signal an interruption in the hiking cycle probably means that 4.5% is seen as a level for the policy rate which is consistent with a neutral monetary policy. 

After reading the statement, we expect that the central bank will leave the policy rate unchanged in the remaining decisions of this year (previously we expected the policy rate to reach 4.75% this year). However, we continue to expect rate hikes in 2015, as we believe the equilibrium real interest rate in Colombia will rise with higher U.S. Treasury yields. In fact, some board members, including Governor Uribe, have acknowledged that the loose monetary policy abroad is a key factor behind the fall of the neutral interest rate in Colombia. 


4. Calendar of monetary policy decisions in September

* Source: Bloomberg

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