Itaú BBA - Less monetary stimuli in the end of 2017

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Less monetary stimuli in the end of 2017

January 3, 2018

The number of central banks increasing interest rates was higher in December than the ones that cut rates, for the second consecutive time.

In December, there were monetary policy decisions in 27 of the 33 countries we monitor, with rates reduction in Brazil and rate hikes in the US, Mexico, Turkey and China. In Sweden the central bank announced the end of its asset purchasing program.

In Brazil, the central bank reduced the policy rate by 0.50pp to 7.0%, in line with expectations. In the US and Mexico, monetary authorities hiked interest rates by 0.25pp, as expected. In China, there was a 5pp increase in various interest rates, but the benchmark rate was left unchanged. In Turkey, the central bank raised the late liquidity rate, used for providing temporary liquidity to banks, by 0.50pp, but also left the benchmark rate unchanged. Finally, in Sweden, the central bank announced the end of its asset purchase program.

The number of central banks hiking interest rates was higher than the number of central banks reducing rates for the second consecutive month. In the aggregate, central banks ended 2017 withdrawing stimulus from the economy.



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

In Argentina, the central bank left the monetary policy rate unchanged in December, at 28.75%. Surprisingly, two days after the second December monetary policy meeting, the government announced together with Central Bank’s Governor Federico Sturzenegger higher inflation targets for 2018 (15% without tolerance range versus 10±2%, previously) and 2019 (10% without tolerance range versus 5±1.5%). In the press conference announcing the target changes, Governor Sturzenegger suggested that the new targets leave room for lower interest rates. In fact, on the very day of the announcement, the central bank started to supply its short-term sterilization bills (Lebac’s) at lower rates (with a cut between 240 and 380 bps along the curve from 30 to 270 days). While the new inflat ion targ ets seem more credible than previous ones, the decision to increase inflation targets will likely turn disinflation even harder as inflation expectations will likely increase. In this context, while rate cuts in January seems very likely, it will be very difficult to ease monetary policy afterwards as data on inflation and inflation expectations will likely be unfavorable, amid the key wage bargaining season.

In Brazil, the Monetary Policy Committee (Copom) did what was widely expected and cut the Selic rate by 0.50pp to 7.0% in December, the lowest level of the historical series. The committee signaled, quite clearly, that unless the economy surprises in a major way it will cut the Selic by 25bps, to 6.75% in its next policy meeting, on February 6 and 7. According to the Copom’s assessment, the main downside risks to inflation are the second-round effects of the (no longer present) food price shock and the inertial effects of currently low inflation levels. Upside risks include frustration of the economic reform agenda, and a possible reversal of the external scenario, both pressuring inflation via the exchange rate. In addition, the Copom released its quarterly inflation re port in December, showing forecasts up to the last quarter of 2020. Estimates for 2018 – the dominant monetary policy horizon – are below target in each of the four scenarios. Specifically, the market scenario (market estimates for exchange rates and interest rates) points to inflation at 4.2%, below the 4.5% target. In our view, the current forecasts are consistent with a 0.25pp rate cut in February and another 0.25pp reduction in March, which would lead the Selic rate to 6.5% per year at the end of the first quarter of 2018, ending the monetary easing cycle.

The board of the Chilean central bank unanimously decided to hold the policy rate at 2.5%, as expected by market analysts. The decision was in line with the central bank’s recently published inflation report, which showed the board’s baseline scenario is consistent with rates unchanged at 2.5% until the output gap begins to close (2H18). Nevertheless,more easing is not ruled out as shown by the retention of an easing bias in the press release communicating the decision. In fact, the minutes show that one of the board members believed that in the current scenario of low inflation and weak activity, the policy rate should already be at 2.0% (50-bp of additional easing). Hence, the board will remain attentive to upcoming data to evaluate whether the infl ation co nvergence path is threatened, thereby requiring further easing. We expect the central bank to keep the policy rate stable at 2.5% for most of this year. Yet, if the activity rebound underwhelms (delaying the narrowing of the output gap), the strengthening of the Chilean peso persists and some inflation expectations stay suppressed, we cannot rule out additional rate cuts.

In Colombia, the central bank opted to leave the policy rate on-hold in December, following two consecutive 25-bp rate cuts. Holding the policy rate at 4.75% was the first unanimous decision since October 2016 (when the board voted to leave the policy unchanged at 7.75%, at the peak of the tightening cycle). The decision was expected given the slightly higher than expected November CPI number and, particularly, the S&P downgrade of the sovereign credit rating to one notch above investment grade prior to the meeting. The board remains in data-watch mode and acknowledges that the margin for further easing is limited. Nevertheless, there are indications that the cycle still has some room to run: the expectation remains that inflation will pro gress to wards the 3% target in the coming months (from around 4% in December), in part to the reversion of transitory supply-side shocks; and activity remains sluggish. In addition, general manager Juan José Echavarría specified that inflation at 3.4% by March (close to our 3.3% forecast) would allow for more cuts. We see the easing cycle ending with the policy rate at 4.0%. Well-behaved inflation expectations, the improving external imbalance and still weak activity favor more easing, provided external financial conditions for emerging markets remain benign (in fact, the recent rating downgrade did not deteriorate Colombian asset prices).

The Central Bank of Mexico decided to hike the reference rate by 25 bps (to 7.25%) in December, resuming the tightening cycle after a pause that lasted for the past three meetings. In the statement announcing the decision, the board highlights the outlook for inflation has become more challenging, given the pressures on the currency coming from the Fed’s monetary policy decisions and NAFTA renegotiation, besides the higher-than-expected November CPI. In this context the board considers the balance of risks for inflation has deteriorated and felt necessary to increase the policy rate. The decision was split with one board member voting for a 50-bp rate increase. In the concluding remarks of the statement the board continues to list first the relative mone tary pol icy between Mexico and the U.S. when enumerating the factors that it will monitor ahead. Furthermore, the statement ends with a hawkish sentence, as the board mentions the intensification of risks for the inflation outlook and pledges to take – if needed – “corresponding actions as soon as necessary” to ensure inflation expectation anchoring and inflation convergence to the target. Considering the looming risks related to NAFTA, U.S. monetary policy and Mexican presidential elections – and, of course, the clear hawkish tweak in recent communications – we expect another 25-bp rate hike in February. While we continue to expect the policy rate to peak at 7.5% this year, the risks are clearly tilted towards more rate hikes. 

As expected, the Central Bank of Peru (BCRP) kept the reference rate at 3.25% in its last policy meeting of the year; in line with our call and the majority of firms surveyed by Bloomberg. The statement kept the explicit easing bias, and tweaked the wording on inflation to provide more color of the BCRP’s views on the expected inflation trajectory. The statement now mentions that headline inflation will continue decreasing in the coming months and converge to the 2% target by the end of 2018 (whereas previously the statement just read that inflation would remain within the tolerance range around the 2% target). Also, BCRP policymakers have argued that the decrease of inflation provides them with degrees of freedom to cut rates fu rther, i f the economic acceleration falters. In fact, annual CPI inflation decreased to 1.4% in December (from 1.5% in November), and it will likely fall below 1% in March 2018 because of a large base effect associated to El Niño. Meanwhile, the recent eruption of a political crisis – with President Kuczynski barely escaping impeachment – has caused a spike of uncertainty and, hence, a negative risk on economic activity. The political waters are very agitated, not only because of the impeachment attempt but also due to the fact that Kuczynski granted a humanitarian pardon to former President Alberto Fujimori (1990-2001) who was serving a 25-year prison sentence over human rights crimes. Recent comments from members of the board confirm that they view the deterioration of domestic politics as a threat for the economic growth outlook. Chairman Julio Velarde acknowledged that the political crisis will have a negative effect on the economy , althou gh he qualified his assertion by arguing that the effect would be temporary and mild if the crisis is managed within the framework of the Constitution. More recently, board member Miguel Palomino said that the BCRP’s growth forecast for 2018 (4.2%) now has a negative bias because of the political crisis. Given the low inflation reading and high political uncertainty, we believe the board will deliver a 25-bp rate cut in the next meeting (January 11), leaving the doors open for more cuts.


4. Calendar of monetary policy decisions in January


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