Itaú BBA - Little activity in November, great expectations for December

Global Monetary Policy Monitor

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Little activity in November, great expectations for December

December 2, 2015

In November, only two countries changed monetary stances. In December, the focus will shift to the divergence between the US and Europe.

In November, there were monetary policy decisions in 20 of the 31 countries that we cover. Only two countries (South Africa and Colombia) changed monetary stance, both to the contractionary side, suggesting that the trend of monetary expansion in the world (ex-Latam) is coming to an end. In December, the focus will shift to the divergence between the US and Europe. The Fed will likely hike interest rates for the first time in nine years, while the ECB will probably cut its deposit rate and increase its asset purchase program.

In Latin America, inflation remains high in almost the entire the region (largely due to the past FX depreciation). Many central banks are already hiking rates (Chile, Peru, Colombia), but in those where inflation seems to have stabilized (Peru and Chile) there is indication that the hiking cycle will be modest. In Brazil, the Copom has maintained interest rates steady after a long tightening cycle. We expect the rate to remain stable, although there is risk of new hikes, reflected on Copom’s split decision in November.


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: Navigating current uncertainties

The Brazilian Central Bank’s monetary policy committee (Copom) kept the benchmark Selic rate at 14.25% in its November meeting. Although the decision was in line with expectations – by both analysts and the yield curve – there was a dissent within the Committee. Two (out of eight) board members voted for an increase of 0.50 p.p. in the Selic rate to 14.75%.

The statement accompanying the decision was laconic and brings no further details beyond the split vote. The full press release is translated below:

“Assessing the macroeconomic scenario and inflation prospects, the Copom decided to maintain the Selic rate at 14.25%, without bias, on six votes for stable rates and two votes for a 0.50 p.p. rate hike. The following members of the Committee voted to maintain the Selic rate at 14.25%: Alexandre Antonio Tombini (Chairman), Aldo Luiz Mendes, Altamir Lopes, Anthero de Moraes Meirelles, Luiz Edson Feltrim and Otavio Ribeiro Damaso. The following members of the Committee voted for raising the Selic rate to 14.75%: Sidnei Corrêa Marques and Tony Volpon.”.

Recently, the Copom has been signaling the adoption of necessary measures to bring inflation to the target center (4.5%) by the end of 2017.

The political/fiscal uncertainties continue to pressure inflation expectations and pose risks for monetary policy. Since the last Copom meeting (October 21), the median of analyst estimates for the IPCA inflation for 2016 climbed to 6.64% from 6.12%. Estimates for 2017 also began to rise slightly, moving to 5.12% this week (from 5.00%). Breakeven inflation rates implicit in government bonds are also running at high levels – forward rates stand at 8-9% on the 1-2 year segment and at 7.0-7.5% on the 3-5 year segment –, yet these calculations reflect risk premia embedded in Brazilian assets. The rise in inflation expectations worsens the balance of risks for inflation, in a situation that could prompt the Copom to resume the tightening cycle. These factors are probably the reasons behind the votes in favor of an interest rate hike.

However, economic activity remains quite weak, helping contain secondary effects from the currency depreciation and adjustments in regulated prices. Furthermore, the ongoing deterioration in labor market conditions has potentially disinflationary effects on labor-intensive sectors (e.g., services). Current political/fiscal uncertainties also urge caution in the definition of monetary policy, so as to reduce market volatility. These factors help mitigate the chances of monetary tightening in the short term, and were probably decisive for the six Copom members who voted to leave the Selic rate unchanged.

With relevant factors for the inflation dynamics moving in opposite directions, and considering the substantial uncertainties in the scenario (especially on the political/fiscal front), we understand that prolonging the horizon for inflation convergence is a move that provides greater tranquility for the Copom to adjust monetary policy only if inflation comes under pressure for longer time horizons. Thus, we do not expect the Copom to change its monetary policy stance, unless there are relevant changes in the BCB’s inflation forecast for 2017.

Hence, we maintain our scenario for a stable Selic rate at 14.25% until the end of 2016.

CHILE – Gradual stimulus removal

The central bank of Chile held its policy rate at 3.25% in November, as expected by the majority of the market, but not by us. Nevertheless, the communication maintained the tightening bias with the same wording as the previous month.

The minutes of the meeting show the board also considered raising rates by 25 basis points. However, board members thought that a second consecutive hike could conflict with the baseline scenario in the 3Q15 Inflation Report (IPoM) - which only incorporated one hike until the end of this year - and, consequently, on the guidance of a gradual stimulus removal. The board seems attached to the roadmap outlined in the IPoM: a hiking cycle totaling 50 to 75 bps.                

We still expect the central bank to implement one final 25 basis point rate hike in this cycle. The central bank will present its 4Q15 Inflation Report on December 21, a few days after this month’s monetary policy decision meeting. In this report, we expect to see a downward revision to the growth forecast for 2016, while leaving the inflation forecasts broadly unchanged, thus anticipating the need for a smaller withdrawal of monetary stimulus. While we see a hike to 3.5% this month, there is a risk that it may be delayed to early 2016. The November CPI and the behavior of the exchange-rate leading up to the Fed’s December meeting will play a key role in this month’s meeting.

COLOMBIA - Split board reverts to 25-bp hike

In November, the central bank of Colombia decided to increase its policy rate by 25-bps to 5.50% in a split decision. Nearly 60% of the market (including us) was expecting a second consecutive 50-bp hike as inflation expectations have continued to rise. In the press conference, Governor Uribe revealed that the board was split.

The board remains concerned with the high levels of inflation and the rising inflation expectations. It acknowledged that the October inflation print of 5.89% came in above internal forecasts. So, the 25-bp rate hike, and the third consecutive rate hike, was deemed necessary to ensure that inflation converges to the 3% target. The board views the depreciation of the Colombian peso and the El Niño weather phenomenon as the important sources behind delaying the slowdown of inflation. On the activity front, the central bank considers that the risk that internal demand slows beyond what is consistent with the fall in national income has diminished, also encouraging the board to continue with the hiking cycle.

However, the central bank indicated that given the shocks that the economy is experiencing, a two-year horizon is the appropriate span for inflation convergence to the target. In this context, Governor Uribe said that “an attempt to bring inflation back to the target quickly would produce excessive changes in interest rates and a high cost in terms of employment and economic activity.”

We still expect the tightening cycle to end with the policy rate at 6.0%. The central bank will likely raise the policy rate by 25-bps again both in December and in January. We do not see additional rate moves next year.

PERU - Monetary Policy Decision: On hold, for now

Peru’s central bank held its policy rate at 3.5% in November. This was the second consecutive month in which the board decided to keep the policy rate unchanged, after a 25-bp rate increase in September. Considering that after the September meeting Governor Velarde strongly indicated the board wouldn’t hike in October and November, the decision to maintain rates was broadly expected.

Still, the central bank kept a tightening bias. In the press statement announcing the decision, the board indicated that they are attentively monitoring inflation and inflation expectations to evaluate the necessity of rate adjustments. The press release also notes that inflation has been affected by temporary supply-side shocks. Activity is expected to accelerate in the 2H15 and grow near its potential in 2016, also according to the statement.

We expect the central bank to implement additional rate hikes, taking the policy rate to 4.0% in 1Q16. The El Niño weather phenomenon as well as the exchange-rate weakening will likely pressure inflation ahead, at a time when inflation expectations are already too high. Furthermore, rate hikes would also help to limit the depreciation pace of the exchange-rate.  

MEXICO - Hikes after the Fed

Amid a still incipient recovery and low inflation, the recent stabilization of the exchange-rate reduces the odds that the central bank will follow the Fed. In October, the central bank left the tone of the statement announcing the decision unchanged from the previous meeting, in spite of the more hawkish tone of the Fed’s statement the day before. Governor Carstens then explicitly said that the response of the Mexico’s central bank to the Fed shouldn’t be automatic.

We continue to expect the first interest rate increase in Mexico only in 1Q16, after the Fed’s liftoff in December. By the end of next year, we expect the policy rate to finish at 4.0%, 100-bps above the current level.  


4. Calendar of monetary policy decisions in December
 * Source: Bloomberg

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