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Global Monetary Policy Monitor

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Stable Interest Rates in November, Except for a Cut in China and a Hike in Indonesia.

December 4, 2014

Monetary policy decisions were made in November in 22 countries or regions that we cover.

Monetary policy decisions were made in November in 22 countries or regions (the euro zone and the UK) that we cover. Benchmark interest rates were adjusted in just two of them, both surprising market expectations. China reduced its rate by 40 bps, to 5.60%. The move was on investors’ radars, given the economic slowdown in the second half, but it happened sooner than expected. Meanwhile, Indonesia lifted its benchmark rate by 25 bps in an extraordinary meeting by authorities in reaction to an increase in subsidized energy prices.

In Latin America, most central banks are on hold. On the one hand, economic deceleration and the recent decline in oil prices could create room for more expansive monetary policies. On the other hand, inflation is still under pressure in several nations and exchange rates depreciated recently, requiring caution.

Brazil is an exception. It resumed its interest-rate hiking cycle in October and accelerated the tightening pace to 50 bps in an early December meeting (no meeting was scheduled for November). Growth remains slow, but high inflation, inflation expectations still above the target and pressure stemming from the exchange rate and increases in regulated prices require additional adjustments in monetary conditions.

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: Copom accelerates the pace, but signals a short cycle 

There was no monetary policy meeting in November in Brazil. 

In the its December meeting (Dec 3), the Brazilian Central Bank’s Monetary Policy Committee (Copom) increased the benchmark Selic interest rate by 50 bps to 11.75% p.a.  In its previous meeting (October), the Copom had resumed the tightening cycle, with a 25 bps.increase in the Selic rate.

The December decision was in line with expectations, but the post-meeting statement was surprising to some, as it signaled a short interest-rate hiking cycle ahead:

“The Copom decided unanimously to intensify, at the moment, the adjustment in the Selic rate and raise it by 0.50 p.p. to 11.75% p.a., without bias. Considering the cumulative and lagged effects of monetary policy, among other factors, the Committee evaluates that the additional monetary policy effort tends to be implemented parsimoniously”.

The expression “at the moment” suggests, in our view, that the Copom anticipates a short cycle of rate increases ahead. By mentioning the “cumulative and lagged effects of monetary policy” and “other factors” (likely a reference to the recent decline in commodity prices and the fiscal adjustment), the Copom reinforces this signal and indicates that the next interest-rate increases will be implemented at a pace of, at most, 50 bps per meeting.

In the next meeting, in January, we expect the Copom to increase the Selic again by 50 bps. Indeed, inflation remains high and recent exchange-rate depreciation tends to exert pressure on prices, even in a backdrop of weak economic growth and falling commodity prices.

The fiscal adjustment of 2015, indicated by the new economic team, tends to complement monetary policy efforts, which is important to put inflation on a downward path in the next years.

Hence, we understand that the December decision and the prospective economic scenario are compatible with our forecast of an additional 50 bp-increase in the Selic in January and a final adjustment of 25 bps in March, taking the rate to 12.50%. 

Mexico: Another Unanimous Decision to Leave Rates On-hold

The minutes of the most recent monetary policy meeting in Mexico revealed that all the board members agreed in keeping the policy rate unchanged at 3.0%. In the document, most board members affirmed that the balance of risks, both to activity and inflation, remains the same as in the previous decision, as indicated in the press statement released after the meeting. 

Most board members highlighted that global economic activity is showing signs of weakness, particularly the euro zone. However, all agreed that the U.S. economy has continued recovering during the third quarter of the year, and the majority expects that it will continue strengthening. 

All board members indicated that the most recent information suggests that economic activity in Mexico continued recovering in 3Q14, albeit at a moderate pace. The economic recovery is being driven by external demand, but there are signs of a gradual recovery in investment and consumption. Although there are signs of slower growth for the world economy, most board members mentioned that the positive prospects for the U.S. economy, alongside the implementation of the recently approved structural reforms, have contributed to maintain the balance of risks to activity. Most board members considered that the output gap remains negative although it has started to narrow. 

The board also discussed the recent decline of oil prices and rising insecurity. The majority of them warned that low oil prices in addition to the reduction in oil production could harm economic activity, in particular by its effect on the borrowing requirements of the public sector and the current account. Also, the majority added that the recent social unrest could weaken confidence levels in domestic and foreign economic agents. 

The majority of the board members mentioned that although inflation has remained above 4% in the last few months, it will start falling as the transitory factors lifting inflation dissipate. Most board members see inflation at around 4% by year-end, and the majority expects inflation to converge to 3% in mid-2015 due lower price hikes for gasoline, the elimination of long-distance tariffs and the fading impact of tax hikes introduced at the beginning of this year. As upside risks, the majority highlighted the possibility of renewed episodes of volatility in the financial markets, which would lead to a higher depreciation of the currency and a considerable increase of the minimum wage. The majority of the board members indicated that medium- and long-term expectations have remained stable. 

In our view, the minutes give another indication that the board is not planning any move in the policy rate soon. Furthermore, as the economy continues to recover and the Fed raises rates, the next move will be a hike. We expect the central bank to start a preemptive hiking cycle (that is, before demand-side inflationary pressures emerge) at the end of 2Q15.

Chile: Neutral Tone as Rates Remain on Hold

In its November Monetary Policy Meeting, the Central Bank of Chile unanimously decided to leave its reference interest rate unchanged at 3.0%. The decision was widely expected. The press statement announcing the decision kept the neutral tone applied in the previous decision, hinting that the central bank is not planning any policy move soon.

Domestically, the board noted that Chile’s economy remains weak, but more attention was paid to the evolution of inflation. The board classified the upside surprise in October’s CPI as “significant” and said that in the most likely scenario inflation would remain above the upper bound of the target for another few months. 

The minutes of the meeting showed that while the board members shared the view that recent inflation numbers are primarily due to transitory factors, the persistence of high inflation brought a debate over the uncertainty of the current size of the output gap. Specifically, some board members seem to doubt that it is as wide as currently believed.

We expect Chile’s central bank to keep the policy rate unchanged at 3.0% at least until the end of 2015. However, as activity remains weak and lower energy prices are likely to aid the deceleration of inflation, there is a possibility that the central bank could deem it appropriate to introduce additional stimulus next year. The upcoming monetary policy report (out on December 15) will be key to assess the probability of policy moves in the short-term. 

Colombia: Unchanged Rates and Tone, Amid Declining Oil Prices

Unsurprisingly, the central bank of Colombia decided to leave the policy rate at 4.5% in its November meeting. The press statement announcing the decision maintained the neutral tone of the previous decision, highlighting on one hand the solid economic growth and, on the other, the higher uncertainty over external factors. As was the case in the previous meeting, Governor Uribe communicated that it was a unanimous decision.

The central bank noted in the press statement announcing the decision that oil prices fell once more and are below the levels forecasted by the internal technical team. This has resulted in a deterioration of Colombia’s terms of trade, in spite of coffee prices remaining high, and will have a negative impact on domestic income.

In clarifying its decision, the board emphasized that internal demand was growing strongly, in an economy operating near its full capacity, while inflation expectations are still well-anchored. But, considering the deterioration of terms of trade and the growing uncertainty over global economic activity and external borrowing costs, the board found it appropriate to keep the policy rate unchanged. 

We expect no further rate moves this year (yearend rate of 4.5%). In 2015, we currently expect rate hikes (to 5.0%), but the risks that the central bank will remain on-hold are clearly increasing.

Peru: Interest Rate Held, But Reserve Requirement Lowered Once Again

As expected, Peru’s central bank held the policy rate at 3.50%. This is the second consecutive month in which the board has taken this decision following a 25 bp rate cut in September. According to the press statement, the decision took into account that (i) actual and projected GDP growth continues below potential, (ii) inflation expectations remain well-anchored, and (iii) there are mixed signals of a global economic recovery, amid greater financial and foreign exchange market volatility.

The Board continues to maintain its easing bias by expressing that it would monitor inflation expectations and its determinants in order to, if necessary, implement additional easing measures.  

Later on in November, the central bank lowered the reserve requirements for local currency to 9.5%, from 10.0%, effective from the start of December. This follows a sequence of consecutive 0.5 pp reductions.

As the Peruvian economy remains weak, we expect the central bank to implement additional monetary easing through both its more traditional instrument (policy rate) and reserve requirements. However, given the financial market volatility we believe the board will wait until there some stability before the interest rate is cut again. In face of this volatility, the central bank has been active in the foreign exchange market, smoothing the depreciation of the sol, by using swap contracts, issuing dollar-linked certificates of deposit and intervening directly in the spot market (in November, the central bank directly sold roughly USD 1.1 billion in the spot market). 


4. Calendar of monetary policy decisions in December

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