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More easing ahead in LatAm

September 6, 2017

Well-behaved exchange rates and spare capacity leave room for additional monetary easing in most LatAm countries.

In August, there were monetary policy decisions in 17 of the 33 countries we monitor, with interest rate cuts in four countries and one central bank raising interest rates.

There were rate cuts in the following countries: Colombia (by 25 bps, in line with expectations), India (by 25 bps, in line with consensus), Indonesia (by 25 bps; market was expecting no rate move) and Paraguay (by 25 bps, in line with our forecast). Conversely, in the Czech Republic, the monetary authority hiked the policy rate by 20 bps, in line with expectations. As a result, the number of central banks reducing interest rates continued to exceed the number of central banks implementing rate hikes.

In September, we expect both the ECB and the Fed to maintain the monetary stimulus in place. In Latin America, well-behaved exchange rates and spare capacity leave room for additional monetary easing in most countries. In Brazil, we expect another 100-bp cut and the post-meeting statement will show whether the monetary policy committee will signal a slower easing pace in coming meetings. In Chile, we forecast the policy rate at 2% by the end of this year, compared to the current level of 2.5% and the inflation report (to be published this week) will clarify whether a rate reduction already in September’s meeting is likely or now. We expect Colombia’s central bank to leave the policy rate unchanged this month, but we expect further easing in 2018 as inflationary pressures fade. In Peru, we continue to expect the central bank to deliver two additional 25-bp cuts in 2017, bringing the policy rate to 3.25%, but in September we forecast the policy rate on-hold. On the other hand, in Mexico, we do not expect additional rate cuts before the start of the second half of 2018, due to the uncertainties surrounding trade relations with the U.S. and the presidential elections next year, in addition to the likely interest rate increases in the U.S.. In Argentina, inflation remains well above the ambitious targets set by the central bank, limiting the space for cuts in the short-term and leaving alive the possibility of new rate increases. 


 

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 left the monetary policy rate unchanged at 26.25% in its second meeting of August for the ninth consecutive time. The press release announcing the decision noted that, according to high frequency indicators tracked by the central bank, inflation will likely fall in August, but core inflation remains above the level sought by the central bank. Once again, in the statement the central bank pledged to keep “a clear anti-inflationary bias” (meaning a tight monetary policy) to achieve the inflation targets for this year (12% - 17%) and the next (10% ± 2%). Also in August, the president of the central bank, Federico Sturzenegger, hinted it could tighten monetary policy further given the uncomfortable inflation levels, so in the short-term the risk continues skewed towards rate hikes, in spite of the better performance of the Argentine peso. Our base scenario has the policy rate ending this year at 25%, but given the persistence of inflation we do not expect changes in the reference rate before November and we cannot fully rule out a new hike if disinflation does not materialize. 

In Brazil, the Monetary Policy Committee (Copom) will meet again this week. We expect the Copom to repeat the easing pace of its previous meeting, cutting the Selic rate by 100 bps, which would be consistent with stable economic conditions and unchanged estimates of the extension of the cycle since the July meeting. In the statement, we expect the committee to signal that the stabilization of economic conditions, in an environment of real interest rate at historically low and expansionary levels, will likely allow for a reduction in the easing pace from the next meeting (October 24-25) on. If that occurs, monetary policy would then shift, after the September meeting, to a stage of calibration of the easing cycle. We maintain our expectation of a 100-bps cut at the September meeting, followed by two 50-bps cuts in the last two meetings of the year, and an additional 25-bps cut of at the beginning of 2018, leading the Selic rate to a final level of 7.0%.

In Chile, the central bank left the policy rate unchanged in August as expected and kept a neutral bias. The minutes of the meeting showed the board was once again split, with board member Pablo Garcia opting for a 25-bp rate cut for a second consecutive month. The minutes also reveal that the technical staff offered two options for the board to consider: the first of them was to keep the policy rate and the neutral bias unchanged (the chosen option), while the other was a 25-bp rate cut and the adoption of an easing bias (differing from the previous meeting when only staying on-hold was presented as an option). At the upcoming Inflation Report (to be published on September 6), a downward revision of the inflation and growth forecasts is likely. In this context, we expect the central bank to signal in the report a policy rate path somewhat below that outlined in various surveys (one additional 25-bp cut), which would be consistent with one of the options presented by the staff to the board in the August policy meeting and with our scenario of two additional 25-bp rate cuts before yearend. However, from the board members commentary in the minutes we acknowledge that the central bank may opt to signal in the report rates unchanged ahead, meaning that further downside surprises on growth and/or inflation would be necessary to trigger rate cuts.  

The central bank of Colombia cut the policy rate in August by 25 bps, to 5.25%, in line with our expectation and that of the vast majority of market analysts. There are elements in the statement indicating the central bank will likely pause the cycle. Specifically, the central bank says that the current real interest rate is compatible with inflation converging to the 3% target and that some indicators suggest it is close to a neutral level. However, the central bank surprisingly left open the possibility of further cuts this year.
The less conservative than expected stance was likely due to the July CPI, which showed a broad moderation of inflationary pressures. In this context, two board members (out of seven) voted for a 50-bp rate cut and general manager Juan José Echavarría said in the press conference that the August cut could be one of the final rate cuts of the year. Furthermore, the general manager said bringing the policy rate below neutral levels is a possibility (depending on the incoming data). We expect the central bank to stay on hold until the end of this year, but we anticipate further easing to resume in the first quarter of 2018 (bringing the policy rate to 4.5%). But the communication of the central bank shows there is a risk that new cuts materialize sooner than we (and the market) expect. Much will depend on the evolution of inflation. Because activity remains weak and the external scenario very helpful for the exchange rate, inflation can surprise to the downside leaving room for a more front-loaded cycle.

After an eighteen-month tightening cycle (400-bps since December 2015, taking the policy rate to 7%), the Central Bank of Mexico left the monetary policy rate unchanged in August, and signaled that it has transitioned into a neutral stance. The minutes of the meeting show two board members (out of five) remain more cautious (with one of them still mentioning the possibility of further interest rate hikes). Nevertheless, the majority of board members have a more optimistic view on the inflation outlook, arguing that many inflation measures have slowed down and some are falling. Still, based on recent communication, even the most dovish board members seem unwilling to deliver rate cuts. In one of his latest interviews (to Reuters), Governor Carstens put the presidential elections as an obstacle for monetary easing. In the same spirit, according to the previous minutes (corresponding to the June’s meeting, which featured Banxico’s last rate hike), even the only board member who voted to leave the reference rate unchanged in June argued that it will be difficult to deliver the rate cuts that the market is expecting in 2018 because of the volatility associated to the presidential elections. The communication of the central bank also suggests that uncertainty over NAFTA renegotiations and Fed rate hikes are constraints for monetary easing. Finally, in the latest inflation report the central bank increased its growth forecasts (to levels consistent with trend growth, at a time that there is little, if any, slack in the economy) and said it still sees the current level of real interest rate within a range consistent with neutrality, also weakening the case for lower rates. We expect rate cuts only in the second half of 2018 (our forecast for the yearend policy rate next year is 6.5%).     

Peru’s Central Bank (BCRP) remains in easing mode, in spite of an increase of inflation in the short-term. The Central Bank’s Chairman, Julio Velarde, had already warned that August’s inflation will be pressured by a supply shock which he dubbed the “lemonade effect”; that is, a combination of sharp rises in regulated water tariffs and lemon prices. In fact, the August CPI came in at 3.2% year over year (From 2.9% in July), above both expectations and the tolerance range around the 2% target. However, we believe that the BCRP will probably look through the “lemonade effect”, and continue cutting rates in 2H17. Speaking at a press conference in late August, Chairman Velarde stated that the BCRP plans to deliver one or two additional rate cuts in 2017 (something that he had already said publicly in July). A rate cut in September, nevertheless, seems unlikely because the board will want to see how inflation expectations react to the “lemonade effect”. In the meantime, easing is being delivered through lower reserve requirements. Looking ahead, we continue expecting the BCRP to deliver two additional 25-bp rate cuts in 2017, taking the reference rate to 3.25%.


 

4. Calendar of monetary policy decisions in September


 


 



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