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LatAm countries cut rates again in January

February 2, 2018

In January, the economies increasing rates have again become outnumbered by those cutting rates.

In January there were monetary policy decisions in 18 of the 33 countries we monitor, with rate reductions in Argentina, Colombia and Peru and rate hikes in Canada and Malaysia. There were no changes in interest rates in the U.S., Eurozone and Japan.

In Argentina, the central bank reduced the policy rate by 1.50pp (0.75pp in each fortnightly meeting), surprising market expectations. In Colombia and Peru, monetary authorities cut rates by 0.25 pp, in line with expectations. Also as expected, the central banks of Canada and Malaysia hiked rates by 0.25 pp, to 1.25% and 3.25%, respectively. Finally, there were monetary policy meetings in the U.S. and Eurozone, both with no interest rate changes.

The number of central banks hiking interest rates has become again lower than the number of central banks reducing rates. In the aggregate, central banks started 2018 by adding stimulus in the economy.

In the beginning of February, Chile’s central bank kept the policy rate unchanged at 2.5%, in line with market consensus. Over the next weeks, we expect the central banks of Brazil and Peru to cut their policy rates by 0.25pp, and a 0.25pp hike in Mexico.


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 Argentine Central Bank cut the monetary policy rate twice in January, by 150 bps to 27.25% (75-bps in each of the two monthly meetings). In the statement accompanying the latest monetary decision, the central bank said that core inflation resumed a disinflation trend and broke the persistence level of 1H17. As stated previously in the monetary policy report, the central bank affirmed that the initial conditions for further disinflation are better in 2018 because the current ex-ante real interest rate is substantially higher than in early 2017. The central bank estimated that rate at 10.5%, up significantly from 3.9% in early 2017. Still, the monetary authority reiterated that it will be cautious in the accommodation of the monetary policy rate to the new disinflation path (a new inflation target of 15% this year versus 10±2%, previously). We believe it is likely that the central bank will opt to stay put in February. The expectation survey to be published on February 2 will likely show higher inflation expectations, given that the latest poll was carried out before the government changed the inflation targets for this year and 2019. In addition, private sector estimates of inflation suggest no significant relief, at the beginning of the key wage-bargaining season.

In Brazil, the first policy meeting of 2018 will take place on February 6 and 7. Recent data continue to show an environment of low inflation and anchored expectations, in a context of gradual recovery of economic activity. Copom's inflation forecasts will likely show the same levels as those reported in the most recent inflation report and monetary policy meeting. Therefore, we continue to expect the Copom to announce a 25-bp rate cut, to 6.75%. This pace reduction would be in line with the committee's communication, according to which if the baseline scenario were to evolve as expected (which it did, in our view), it would be appropriate to moderately reduce the pace of monetary easing vis-à-vis the 50-bp cut delivered in December. When communicating about its next steps, the Copom will probably leave the March decision open. Nevertheless, we believe that, even in the case of frustration of expectations regarding the approval of the pension reform at the beginning of the year, the authorities may consider additional stimulus appropriate, given the magnitude of estimated idle capacity, the balance of risks around the baseline scenario (which may be influenced by the recent appreciation of the Brazilian Real) and the slow pace of convergence of inflation to the target. Thus, we maintain our view that the end of the cycle will only come in March, with a final cut of 25 bps, taking the Selic rate to 6.5%.

In line with market consensus, the central bank of Chile held the policy rate at 2.5% in January. The decision had the full support of the board. Overall, the decision is in line with the central bank’s baseline scenario (outlined in the December Inflation Report) of rates on hold for most of the year until the output gap begins to close. Additionally, the press release communicating the decision retained an easing bias, as expected, but the board noted reduced risks to the growth outlook. Inflation is in line with the central bank’s outlook (although it is currently running around the lower bound around central bank’s 3% target), but the board remains vigilant to downside risks (likely coming for the recent behavior of the Chilean peso). We expect the policy rate to remain stable at 2.5% during 2018, as inflation stays low and the activity recovery unfolds. While more easing is still a possibility (especially due to the behavior of tradable inflation), the central bank messaging appears to be gradually moving away from an easing bias on the back of firmer activity.

The board of Colombia’s central bank cut the policy rate by 25 bps to 4.50% at the first monetary policy meeting of 2018. According to different surveys, the market was split between a rate cut and no move. We expected the board would stay put – and resume cutting the policy rate only when more positive news on inflation emerged. We believe the new meeting schedule (next rate decision only in March) also influenced the decision, considering the congressional and presidential election period ahead (something highlighted by finance minister Cardenas, who is also a voting board member of the central bank). The board was split 4-3 in its decision (a minority voted for unchanged rates) and follows the unanimous decision to stay on hold at the December meeting. The most surprising element of the meeting is the explicit indication that the cut brings the easing cycle to an end. During the press conference, general manager Echavarría added that the reference to the end of the cycle can be viewed as for “the next 6 months” before further data is analyzed (once more adding some uncertainty in messaging). In our view, the monetary stimulus in place is mild (which the central bank agrees, as it states that the current level of real interest rates is only slightly expansionary) given the weakness of the economy and so we still expect further easing (to 4% before the end of this year). Besides a negative output gap, a benign external environment (supportive of the COP) will likely help to contain inflationary pressures, leading to additional interest rate cuts. 

Mexico’s central bank resumed the tightening cycle in December (hiking 25 bps, to 7.25%), after staying on hold for the past three meetings. The statement and minutes of the decision suggest another rate hike in February is likely. The latest comments of board members to the press are consistent with the guidance in these policy documents. On January 29, in an interview for the Financial Times, Governor Díaz de León stated that even though headline inflation moved down in the first half of January (to 5.5%, from 6.9% in the second half of December, mainly because of a base effect associated to energy prices) the board is “very vigilant that this trend will be maintained […] and very conscious of the uncertainties ahead. In the same spirit, speaking at a conference in Mexico City on January 15, Deputy Governor Javier Guzmán said that “additional upward adjustments to the reference rate may be required, even in the very short term”. He also expressed concerns about the exchange rate volatility that might take place in 1H18, amid NAFTA renegotiation, elections and Fed monetary policy normalization. We expect the board to hike the reference rate by 25 bps in the first meeting of the year (February 8). Importantly, Irene Espinosa, former Head of Treasury at the Ministry of Finance, was confirmed by the Senate as Deputy Governor. She will occupy the 5th seat (empty since December 2017, when Agustín Carstens left the board and Alejandro Díaz de León took over as the new Governor). In our view, it is unlikely that she will dissent from the majority in its first decision. While we see the policy rate peaking at 7.5% in 2018 (so no further hikes after this month’s), we still see a risk (albeit diminishing) for April’s decision, given that the Fed will likely hike in March and uncertainties related to NAFTA and elections are unlikely to disappear by then. Assuming risks dissipate, we expect the board to deliver two 25-bp rate cuts in the second half the year, taking the reference rate back to 7%.

The Central Bank of Peru (BCRP) decided to cut the reference rate by 25 bps (to 3%) at the first meeting of the year, in line with our expectation and that of the majority of analysts (only 4 out of 13 firms, surveyed by Bloomberg, expected no action). The decision came amid consistent downward surprises in inflation and board members expressing their concerns about the potential effects of the political crisis on the growth outlook. Recent comments by board members indicate that they have a somewhat more cautious outlook for economic growth. In an interview published by local newspaper Gestión on January 22, board member Elmer Cuba – who had a bullish discourse on growth in the last months of last year – mentioned the risks associated to different political scenarios and argued that the economic recovery  in 2018 might not improve labor market conditions meaningfully.  Meanwhile, annual inflation continued decreasing in January (1.3%, from 1.4% in December), with core inflation falling below the BCRP’s 2% target for the first time in more than five years. Also, coincident data point to weak growth of the GDP proxy in December (to be announced on February 15) which we estimate at 1.4% year-over-year. Against this backdrop of broad-based disinflation and disappointing GDP growth in 4Q17, we believe the BCRP will cut rates again by 25 bps in the next meeting (February 8) and then stay put for the rest of the year as the economic recovery gains traction and inflation firms up gradually.   

4. Calendar of monetary policy decisions in February

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