Itaú BBA - Global bias is still expansionary, but stabilizing

Global Monetary Policy Monitor

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Global bias is still expansionary, but stabilizing

May 3, 2016

The environment continued to benefit global financial conditions, especially for Latin America

In April, monetary policy decisions were taken in 20 of the 31 countries that we monitor. The expansionary bias in global monetary policy continues, with few countries announcing changes. The central banks in India and Hungary cut interest rates, in line with expectations. Japan’s central bank, on the other hand, did not announced additional monetary stimulus, disappointing expectations. On the contractionary side, only Colombia hiked rates in the month. The Fed signaled caution regarding the global scenario, suggesting there is no rush to continue its hiking cycle.

This environment continued to benefit global financial conditions, especially for Latin America. Low growth and less pressure on exchange rates reduce the need for further rate hikes. We forecast stable interest rates in Chile, Peru and Mexico this year. The sole exception is still Colombia, where interest rates are rising faster and we anticipate two additional 0.25 pp hikes due to inflation still under pressure, combined with a wide current account deficit and the resilience of economic activity. In Brazil, we expect a cycle of interest rate cuts starting in the second half of the year.


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: Stable rates, for now

The Central Bank’s monetary policy committee (COPOM) maintained the SELIC rate at 14.25% in its April meeting, as expected. The decision was unanimous, in contrast to the previous 3 meetings, in which two members voted to increase the Selic rate.

The statement that followed the decision states that the improvement in the inflation scenario is still insufficient to allow for rate cuts:

“The Committee recognizes advances in the fight against inflation, especially in restraining the secondary effects of adjustments in relative prices. However, it considers that high year-over-year inflation and inflation expectations are distant from the targets do not offer space for easing monetary policy.”

This signals that rates are likely to remain constant in the near future.

By mentioning high 12-month inflation and inflation expectations distant from the targets, the COPOM indicates that there are no conditions yet to ease monetary policy. In our base-case scenario, we believe that 12-month inflation and inflation expectations will continue to converge gradually to the targets (this already started to occur in latest months), because of the prolonged recession, the end of relative prices realignment and prospects of a more stable exchange rate.

Therefore, we believe that the evolution of the scenario will allow the central bank to start a cycle of rate cuts (50bps per meeting) in the second half of this year.


CHILE – A gradual moderation of the tightening bias

At its April monetary policy meeting, the central bank of Chile unanimously decided to leave the policy rate unchanged at 3.50%, as was widely expected. This was the fourth consecutive decision to remain on hold and follows reduced growth and inflation forecasts in the 1Q16 Monetary policy report (IPoM). In the minutes the board emphasized that the removal of monetary stimulus will likely happen at a more gradual pace than indicated previously, consistent with the guidance of the 1Q16 monetary policy report (which assumes only one 25-bp rate hike this year).

We do not expect further rate hikes this year. The still widening output gap, alongside the recent evolution of the currency, means that inflation would decelerate in coming months. However, given that a tightening bias remains and inflation is still above the upper-bound of the target, the risks for our policy rate forecasts continue tilted to the upside.


COLOMBIA – A firmer response

In a surprise move, the central bank of Colombia increased its policy rate by 50-basis points to 7.0% in April. We, alongside most market participants, were expecting a 25-bp hike. At the press conference following the meeting, Governor Uribe announced that the decision was not unanimous, which has been the case since October last year, but this time the minority likely favored a smaller 25-bp hike. After eight consecutive rate hikes, the policy rate has increased 250 bps. The statement announcing the decision did not suggest that the tightening cycle is set to end soon.

More rate hikes are likely. The central bank mentioned that apart from monitoring the evolution of inflation and inflation expectations to decide future adjustment to the policy rate, it would also observe the adjustment of expenditure to ensure it is consistent with long-term income, a sustainable current account deficit and overall macroeconomic stability.

We now expect the central bank to continue with the tightening cycle until the rate reaches 7.5%. We expect the minutes to shed more light on future monetary policy actions. At first, we believe that the central bank will move back to 25-bp per meeting rate increases. However, the pace of hikes will depend on the next data on inflation and inflation expectations.


PERU – Staying on hold

As expected, the central bank of Peru held its policy rate at 4.25% in its April monthly meeting. This was the second consecutive month that the rate stays on hold. The press release announcing the decision retained a tightening bias, but the board removed the reference to the evolution of inflation expectations as a factor that would affect the course of monetary policy.

Moderating inflation and inflation expectations and the recent exchange-rate appreciation were the factors behind the decision to leave the policy rate unchanged. The central bank made note of the moderation in inflation expectations for 2017, currently sitting between 2.8% and 3.3%, moving towards the central bank’s target. Additionally, the central bank highlighted the partial reversion in food prices and the deceleration in core inflation. The press release also stressed the favorable impact of the recent strengthening of the sol on inflation.

We now expect no further rate hikes in our forecast horizon this year, so the policy rate would remain at 4.25%(previously we expected one additional 25-bp rate hike this year). As the shocks affecting inflation (exchange-rate depreciation and El Niño) fades, the central bank will likely remain on-hold. Still, given that a tightening bias remains and inflation is still above the upper-bound of the target, the risks for our policy rate forecasts continue tilted to the upside. 


4. Calendar of monetary policy decisions in May


** Decision already made.



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