Itaú BBA - Global Trend Remains Expansionary, Except in Brazil

Global Monetary Policy Monitor

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Global Trend Remains Expansionary, Except in Brazil

April 1, 2015

In March, monetary policy decisions were made in 27 of the 31 countries under our coverage.

In March, monetary policy decisions were made in 27 of the 31 countries under our coverage. Seven central banks cut their benchmark interest rate: Sweden, India, South Korea, Thailand, Russia, Hungary and Poland. In five cases, the move was larger than expected, or it was accompanied by additional monetary expansion measures (as was the case in Sweden, which expanded its asset-purchase program). Brazil was the only country that increased interest rates, running counter to the global expansionary trend.

Other Latin American countries have been keeping their monetary rates unchanged amid the economic slowdown on one hand and exchange rate depreciation on the other. However, current inflation under pressure has led some central banks, such as Chile’s and Colombia’s, to adopt a more hawkish rhetoric. And in Mexico, the imminent interest rate hikes in the U.S. have been leading the central bank to signal an interest rate hike this year, despite tamed inflation.

1. Policy rates: Historical table


2. Charts



3. Monetary policy in Latam

BRAZIL: Tightening cycle close to the end

In its March meeting, the Monetary Policy Committee of the Brazilian Central Bank (Copom) raised again the Selic rate by 50 bps, to 12.75%. The decision was unanimous, and in line with expectations. In the minutes of the meeting, the Copom recognized that inflation will be higher in 2015, but maintained the scenario of convergence to the target in 2016.

This signal was reinforced in the 1Q15 Inflation Report, also published this month. The report brought an important discussion about the effects of the ongoing realignment of relative prices (regulated prices, exchange rate) on inflation. According to the Copom, high current inflation “largely” reflects this realignment. Going forward, the Copom believes the effects “tend to be circumscribed in the short term, being strongly mitigated in 2016,” due to weak economic activity and the restrictive monetary policy stance. In respect to exchange rate depreciation, its inflationary effects are also reduced by the decline in commodity prices and due to the fact that the depreciation against a currency basket is smaller than the bilateral depreciation against the U.S. dollar.

Inflation forecasts published in the report supported this view. Estimates for 2015 increased compared with the December report, mainly in response to currency depreciation and the increase in regulated prices. However, forecasts for 2016 were virtually unchanged. In the reference scenario (stable interest rates and an exchange rate at 12.75% and 3.15 reais per dollar, respectively), the estimate for the consumer price index IPCA climbed to 7.9% for 2015 (from 6.1% in the December IR), while standing at 4.9% for 2016 (5.0% in December). For 1Q17, the year-over-year change in the IPCA is expected to slip to 4.7%. Forecasts in the market’s scenario (interest rates and exchange rate, according to the median of market expectations) are similar, with the IPCA in 1Q17 a little higher, at 4.9%.

Both in the minutes and in the Inflation Report the Copom stated that the “scenario of inflation convergence to 4.5% in 2016 has been strengthening,” although the advances seen so far “are still insufficient.” We read this as an indication that the monetary adjustment will continue, but it is close to an end.

We understand that the Copom recent communication is consistent to a scenario in which the Copom will finish the monetary adjustment cycle with a final increase in the benchmark Selic rate in April of 25 bps or 50 bps.

MEXICO: Weaker Growth and Lower Inflation, But Central Bank’s Focus Remains on the Fed

As widely expected, Mexico’s central bank left the policy rate unchanged at 3.0%. In the press statement announcing the decision, the board said that there was a deterioration of the balance of risks for activity. So, in spite of the weakening of the exchange-rate, board members think that the balance of risks for inflation remains the same from the previous meeting.

In the concluding remarks, the central bank emphasizes that activity is weak, observed inflation is low and inflation expectations are well anchored. Still, it leaves it clear that its actions will be mostly determined by the relative monetary policy stance of Mexico vis-à-vis that of the U.S. (and the resulting impact on the evolution of the exchange-rate). According to the board members, because Mexico’s economy is closely integrated with the U.S., Fed’s decisions - through their impact on the exchange-rate and inflation expectations - could impact prices in Mexico.

We currently expect Mexico’s central bank to start a tightening cycle in September (with a 25-bp move), together with the Fed’s liftoff. But we see balanced risks for the timing of Mexico’s first hike. Clearly, a sharp weakening of the currency may lead the central bank to move earlier than the Fed. On the other hand, the output gap is negative and its narrowing pace is far from impressive; inflation and core inflation are both at low levels; and the pass-through in Mexico is low. These factors suggest that the central bank may decide to move months after the Fed’s liftoff, especially if volatility does not rise very meaningfully.

CHILE: Introducing a Tightening Bias

In its March Monetary Policy Meeting, the Central Bank of Chile left its reference interest rate unchanged at 3.0%, as expected. On the domestic front, inflation was the key concern. The board pointed at the fact that inflation surprised the market in February, for a second time in a row, while core inflation remains elevated.

In the March Monetary Policy Report (IPoM), the central bank assumes in its baseline scenario a path for the policy rate slightly above survey’s expectations (3% by the end of this year and 3.5% by the end of 2016), implying that board members are moving away from its neutral bias and the discussion is now when to hike. When presenting the report Governor Rodrigo Vergara reinforced the tightening bias (“the scenario eliminates the possibility of rate cuts”), but also indicated that hikes in the very near term are unlikely, as he said that the board would likely discuss the appropriate time for hikes by the end of the year.     

We expect the policy rate to remain unchanged this year. For 2016, our base case is also that the central bank will remain on-hold. However, given the recent rhetoric of the central bank, we now see a higher probability of rate hikes.

COLOMBIA: Still Neutral?

The central bank of Colombia voted to hold the policy rate at 4.5% in March. The decision was expected by us and by most market participants. At the press conference, Governor Uribe said that the decision was unanimous.

Since the previous decision, activity disappointed (4Q14 GDP and January’s retail sales were much below expectations) while inflation surprised to the upside. But in the press statement, the central bank kept their 3.6% GDP growth forecast for 2015 (although Governor Uribe mentioned in the press conference that there is a downward bias for this estimate) and highlighted that the increase in inflation is likely transitory, suggesting a neutral bias.  

However, in the press conference after the decision Governor Uribe mentioned the possibility of raising rates, if necessary to contain second-round effects from the peso depreciation. He also said that the central bank could use exchange-rate intervention to combat those pressures. Adolfo Meisel, who also sits in the board of the bank, has also warned on the possibility of rate hikes if inflationary pressures are persistent.

Even so, we continue to expect Colombia’s central bank to deliver two 25-bp rate cuts in 3Q15 (our yearend forecast for the policy rate is 4.0%). As the slowdown consolidates and it becomes clear that the depreciation of the currency is not leading to second round effects, the central bank will likely bring the policy rate to more expansionary levels.

PERU: No surprises as interest rate held at 3.25%

Peru’s central bank held the policy rate at 3.25%, as expected, in its March meeting. The board continues to maintain its easing bias by expressing that it would monitor inflation expectations and its determinants in order to, if necessary, implement additional easing measures. The press release did not show any significant deviation from the previous month’s.

In this context, the central bank has continued to implement additional monetary easing by lowering the reserve requirement for local currency to 7.5% from 8.0%, effective from the beginning of April.

We continue to expect the central bank to cut the policy rate once more this year (to 3.0% in 2Q15). Additional easing through reserve requirements is also possible. However, as Peru’s economy starts to recover and the Fed’s liftoff approaches, the central bank will probably avoid reducing the policy rate further.

4. Calendar of monetary policy decisions in April

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