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More central banks tightening monetary policy

December 4, 2017

For the first time since Feb. 2016, the number of central banks that increased rates was higher than the ones that cut rates.

In November there were monetary policy decisions in 21 of the 33 countries we monitor, with rate cuts in two emerging economies and hikes in two emerging and one developed country.

The countries that reduced their policy rates were: Peru (by 0.25 bps) and Colombia (by 0.25 bps), both surprising market expectations of staying on hold. Argentina’s central bank also surprised, to the upside, by hiking rates by 100 bps. In line with market forecasts, the central banks in Czech Republic and the UK also increased rates, both by 0.25 bps.

For the first time since February 2016, the number of central banks that increased rates was higher than the number of central banks that cut interest rates.

In December, the Fed’s monetary policy meeting in the US will likely confirm the 0.25-bp hike that is now broadly expected by the markets. We expect the central bank of Mexico to respond with an equivalent hike, taking the benchmark rate to 7.25%. In Brazil, the BCB is set to continue the easing cycle with a 50-bp cut, taking the interest rate to 7.0% and signaling the possibility of a final cut in February. In Colombia and Peru, we expect rates on-hold, but there is the risk of new rate cuts, depending on the data that will come through before the policy meetings take place.

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 its second monetary policy meeting in November, Argentina’s central bank kept its benchmark interest rate (7-day repo rate) on hold. The pause came after the monetary authority surprised the market hiking the reference rate twice by 150 bps and 100 bps in late October and early November, respectively. In the statement announcing the latest decision, the monetary authority expressed confidence in the consolidation of the disinflation process with the current monetary policy stance. More recently, the president of the central bank stated that it is necessary to keep interest rates high for a few more months to help reduce core inflation to 1% month-over-month by April amid a faster than expected increase in regulated prices. We have estimated the contribution of the adjustments in en ergy tar iffs and fuel to the December inflation at 1.5%. In our view, the still uncomfortable inflation outlook and the necessity to push inflation expectations downward (with an eye on the beginning of wage negotiation season) will likely lead to a new rate hike, likely before the end of this year. We expect the monetary authority to hike the reference rate by 100 bps to 29.75% in the second December meeting. We don’t see an easing cycle starting before April 2018 and we have increased our forecast for the reference rate to 24% (from 23% previously) by December next year.

In Brazil, the Monetary Policy Committee (Copom) will meet again on December 5-6. With  recent data continuing to show an environment of low inflation and anchored expectations, the Copom's inflation forecast is expected to decline in 2017 and 2018, compared to the forecasts presented in the October monetary policy meeting. We expect the Copom to cut the policy rate by 50 bps, which would represent a moderate reduction in the 75-bp pace of the last meeting. Furthermore, we believe the committee’s statement will likely signal the possibility of additional monetary easing at the beginning of 2018, if the baseline scenario evolves as expected and the balance of risks remains unchanged, but will probably refrain from commi tting to a pre-defined course of action. Looking ahead, we maintain our call that the Copom will end the easing cycle in February with a 50-bp rate cut, which would bring the Selic rate to the final level of 6.5%. 

The Chilean central bank opted to leave the monetary policy rate on hold at 2.5% in November. The move was widely anticipated by the market after inflation surprised to the upside in October. In our view, the easing bias retained in the press release signals that the board remains attentive to volatile inflation prints and low year-over-year CPI readings, rather than a commitment to increase the monetary stimulus. We expect the central bank to keep the policy rate stable at 2.5% at the December meeting as well as most of next year. Nevertheless, if the activity rebound underwhelms (delaying the narrowing of the output gap), while inflation remains low, we cannot rule out additional rate cuts.

The Colombian central bank cut the policy by 25 bps to 4.75% at its November meeting, in line with our expectation. The market was split, with around half of market analysts vying for no rate move. The decision was by majority, replicating the previous month’s composition: 5 of the 7 board members supported the reduction, while the remaining two favored leaving rates on hold at 5%. In the run-up to the meeting, inflation and activity continued to underwhelm, convincing the board that more easing is required. The technical team believes inflation (currently 4.0%) could reach the 3% target faster than previously anticipated. In terms of activity, the 2% growth rate in 3Q17 came below the staff’s 2.3% forecast, with domestic demand disappointing, so the output gap continues to widen. We no w see the Colombian central bank taking the policy rate to 4.0%. The ongoing positive environment for emerging markets, considering the cautious approach to monetary policy normalization by the developed market’s central banks (namely the Fed and the ECB), will allow for a countercyclical response. The next rate cuts (3x25bps) would materialize before the end of 2Q18, with the precise timing being data dependent.

We expect Mexico’s central bank to increase the policy rate by 25 bps in December, matching Fed’s move. Both in the statement announcing the most recent monetary policy decision and in its latest quarterly report, the central bank mentioned first the relative monetary policy stance between Mexico and the U.S. when listing the factors that the board will monitor for the upcoming decisions. The minutes of the most recent policy decision revealed that concerns over monetary policy in the U.S. are disseminated within the board. In fact, two board members seemed already convinced on the need to react to the likely Fed rate hike in December. We do not identify the new governor of Mexico’s central bank, Alejandro Díaz de León, as one of the more hawkish board members, but since he was appo inted governor his statements were also consistent with further monetary policy tightening. Speaking to the press, he emphasized monetary policy in the U.S. as an important risk for the central bank’s inflation forecast, even though the Mexican peso strengthened since the most recent policy meeting took place. Furthermore, the new governor saw (rightly in our view) the recent slowdown in activity as a result of transitory factors, amid tight labor market conditions. In all, the probability of a rate hike implied in market prices has been increasing and Alejandro Díaz de León did not take the opportunity of his first remarks to the press to discourage the market movement. Given risks related to NAFTA and presidential elections, the central bank is also unlikely to decouple from the Fed during the first half of the year. Although we expect year-over-year inflation to fall substantially during the next seven months, the central ban k will l ikely deliver one additional 25-bp rate hike before the end of 1H18.

The Central Bank of Peru (BCRP) cut the reference rate by 25 bps (to 3.25%) in November, in line with our call and surprising the market. In the week before the meeting, Chairman Velarde had made very optimistic remarks about GDP growth, arguing that a “V-shaped” recovery is in the works. However, headline inflation – along with inflation expectations – fell substantially in the run-up to the board meeting. This was the trigger for the rate cut, in our view. Importantly, November’s monetary policy statement kept the easing bias, in spite of the more optimistic views of BCRP policymakers on economic activity. Furthermore the November CPI came once again below expectations, bringing inflation below the target center, so there is a possibility of another rate cut this month. However, our base case is that the central bank will remain on-hold . In fact, speaking at a conference in Lima, Chairman Julio Velarde said that after cutting rates four times – to 3.25% from 4.25% – and given the fact that credit is not accelerating because of a lack of demand, now it is time to wait for the fiscal impulse.  

4. Calendar of monetary policy decisions in December

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