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Global Monetary Policy Monitor

May 7, 2018

In April, there were rate hikes in Argentina and Turkey and a rate cut in Colombia.

In April, there were monetary policy decisions in 17 of the 33 countries we monitor, with a rate cut in Colombia and rate hikes in Argentina and Turkey. As a result, there were slightly more central banks tightening than central banks cutting interest rates in the month, in contrast with the previous month.

Colombian central bank cut the interest rate by 25 bps, in line with the market consensus. In Turkey, the central bank raised the late liquidity rate, used for providing temporary liquidity to banks, by 75 bps, but left the benchmark rate unchanged. Argentina’s central bank surprised markets by increasing the base rate by 300 bps in an inter-meeting decision at the end of April, which was followed by two other increases (already in May), by 300 and 675 bps, in the midst of pressures on the exchange rate. 

Also in the beginning of May, the Fed stayed on hold, as expected, acknowledging inflation “moved close to” and “is expected to run” near its symmetric two percent objective “over the medium term”, so it continued to signal “further gradual” hikes over the coming months. In Chile, the central bank also kept interest rates unchanged. 

Over the coming weeks, the BOE is set to stay on hold, while in Brazil the BCB will likely deliver a final cut of 25 bps.

 

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
 

The central bank increased three times its policy rate (7-day repo) by 1275-bps in three inter-meeting decisions held since the last week of April, bringing the policy rate to 40%. Furthermore the central bank’s lending rate (47%) and the borrowing rate (33%) imply a wide corridor, giving the central bank degrees of freedom to tighten/loosen monetary policy further without new increases in the reference rate. In the press releases announcing the decisions, the central bank said that “it is ready to act again if necessary.” The central bank added it may continue to intervene in the exchange rate market (not only in the spot but also with futures). We note that the central bank finally allowed the ARS to weaken but after selling USD 7.7 billion since March. We expect the recent measures (that include a faster fiscal consolidation than initially planned) to calm down markets but we note that Argentina still remains vulnerable to changes in external financial conditions, given the wide current account deficit and low reserves. So we do not expect changes in the reference rate in the next scheduled monetary policy meeting. 

In Brazil, the central bank will meet again on May 15 and 16. The signaling in the last Copom’s statement and minutes was that a final 25-bp cut would be appropriate in May, with the aim of mitigating the risk of postponing the convergence of inflation towards the target. The authorities pointed that this would be the flight plan if the scenario moved in line with expectations, but again stated that this assessment could change if there were shifts in the balance of risks. In particular, they stressed that they could stop the easing process in May, if it becomes clear that the risk of postponing the convergence towards the target has become less relevant. The scenario went through significant changes since the last meeting in March, in our view, with ambiguous implications for monetary policy. On one hand, weaker-than-expected activity readings for the beginning of the year could weigh in the direction of a new cut. On the other hand, the recent exchange rate dynamics diminish the risk of having a delayed convergence, tending to reduce the need for additional stimulus. In recent communications, Copom members emphasized that, in their view, the balance of risks for inflation hasn’t significantly changed. They also noted that the exchange rate policy should be seen as independent from monetary policy, so that the recent net offering of FX-swaps does not represent a change of plans in what regards the monetary policy. Therefore, we expect the Copom to follow the path outlined in the last meeting’s statement and deliver a final 25-bp cut, taking the Selic rate to the historical low of 6.25% pa and ending the easing cycle.

In May, the central bank of Chile held the policy rate at 2.5%, as widely expected. The tone of the press release – which confirmed the unanimity of the decision – is close to a neutral stance. The central bank is comfortable with its baseline scenario of steady rates until macroeconomic conditions consolidate the convergence of inflation to 3% target. Nevertheless, in the short-term, the board is still keeping a close eye on downside risks to inflation, especially those coming from a persistently low core component (1.6% in March), which could ultimately delay the expected recovery to the 3% target. In the context of a broad-based activity recovery this year and still low inflation, we believe the board is in no rush to hike rates. Therefore, we do not expect a tightening cycle to start before 1Q19. We also note the recent evolution of the exchange rate could mitigate downside risks to inflation, reducing further the odds of cuts.

The central bank of Colombia resumed the easing cycle, cutting the policy rate by 25bps in April to 4.25%, as expected. The decision had the full support of the board, the first such case since December 2017. In recent months, the board gradually moved away from the indication the easing cycle had ended amid still-weak activity, the ongoing disinflation and a correction of external imbalances. The press release shows the board is on data-dependent mode, so in a context of a strong exchange rate and a negative output gap, more easing is likely. Nevertheless, there is some optimism on the activity front, while General Manager Echavarría sees inflation risks tilted to the upside (due to food prices in 2H18). Echavarría also hinted that the current policy rate level is already expansionary (in the previous statement, the central bank judged the policy rate as only slightly expansionary), but fell short of ruling out additional rate cuts. Overall, we continue to expect one additional 25-bp rate cut to 4.25% before the cycle ends.

The Central Bank of Mexico (Banxico) maintained the reference rate at 7.5% in April, following two consecutive 25-bp rate hikes. In the press release announcing the decision, the board highlighted that the current policy stance is consistent with the convergence of inflation to the 3% target. We note that a similar sentence was included in the press statement of June 2017 when the central bank wanted to indicate a pause in the tightening cycle. Still, the minutes of this meeting – published two weeks later – did not show signs from any board member suggesting that rate cuts could kick-in in the short-term. The majority view is that the balance of risks for inflation remains tilted to the upside. Two board members are clearly more vigilant. One of them mentioned that Banxico should keep alive the possibility of further rate increases. Another board member said that Banxico must not portray an image of complacency by signaling that rate cuts in the short-term are possible. We read the minutes and the statement of the last meeting as consistent with our baseline scenario of rates on-hold for the coming months

The Central Bank of Peru (BCRP) decided to maintain the reference rate at 2.75% in April. The decision to stay put came in the context of somewhat better activity (February’s GDP proxy accelerated to 3.7% qoq/saar, from 1.3% in January) but very low inflation (0.4% year-over-year in March, at the same of the decision, dragged by a base effect) which only firmed up slightly in April (to 0.5% year-over-year). We also highlight that, during the intermeeting period, the BCRP continued to gradually cut foreign currency reserve requirements (to 36% in April, from 37% in March and 70% in December 2016) as a preemptive move against potential tighter external funding conditions (which is particularly relevant for Peru’s partially dollarized economy). In this context, we believe that the easing cycle has concluded. The monetary policy stance is already expansionary, considering that the ex-ante real interest rate is standing at 0.6% (below the 1.8% neutral level estimated by the BCRP) after 150 bps of interest rate cuts delivered between May 2017 and March 2018. In fact, the growth of credit to the private sector from the financial system accelerated to 7.7% year-over-year in March 2018 (from 3.2% in July 2017). Moreover, on April 27, the Chief Economist of the BCRP, Jorge Estrella, made optimistic remarks about activity.  However, we acknowledge that low inflation provides the board with the freedom to cut rates further if the economic recovery that we and the central bank expect does not materialize. For the next meeting, to be held on May 2018, we expect the board to keep the reference rate unchanged. 
 

4. Calendar of monetary policy decisions in May

 



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