Itaú BBA - Surprises in Both Directions

Global Monetary Policy Monitor

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Surprises in Both Directions

November 4, 2014

Monetary policy decisions were made in 22 countries (or regions, in the case of the eurozone and the UK) in our coverage universe in October.

Monetary policy decisions were made in 22 countries (or regions, in the case of the eurozone and the UK) in our coverage universe in October. Central banks in Chile, Poland, South Korea and Sweden reduced their benchmark rates. Cuts in Sweden and Poland were sharper than expected. On the tightening side, rate increases in Brazil and Russia surprised the markets — in Brazil due to the move itself (the market expected rates to remain unchanged) and in Russia due to the magnitude (the market expected a 50-bp hike, while the central bank increased rates by 150 bps).

In terms of non-conventional policies, the U.S. Federal Reserve ended its asset-purchasing program, as expected, while the Bank of Japan surprised the market by announcing additional incentive measures.

This month, in addition to our usual table showing the evolution of benchmark interest rates, we are including another table that outlines our assessment of the current monetary policy stance of each country (or region), ranging from tightening to easing stances.

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 surprisingly increases the Selic rate

The Brazilian Central Bank’s Monetary Policy Committee (Copom) increased the benchmark interest rate (Selic) by 25 basis points to 11.25% p.a. It was a split decision, with five members voting for an increase and three voting to maintain the Selic rate at 11.00%.

The post-meeting statement mentioned worsening of the balance of risks. The decision to adjust monetary conditions preemptively aims to reduce the cost of controlling inflation in the years ahead:

“The Copom decided to raise the Selic rate to 11.25% p.a., without bias, with five votes in favor of the move and three votes for maintaining the Selic rate at 11.00% p.a.

For the Committee, since its last meeting, among other factors, the intensification of relative prices adjustments in the economy made the balance of risks for inflation less favorable. Facing this, the Committee found it timely to adjust monetary conditions so as to ensure, at a lower cost, the prevalence of a more benign scenario for inflation in 2015 and 2016.”

According to the statement, the Copom saw a deterioration in the balance of risks for inflation since its last meeting due "to the intensification of the adjustments in relative prices in the economy", among other factors. We interpret this as a reference to the recent depreciation in the exchange rate and its effects on future inflation.

By stating that the decision aims to ensure a lower cost of disinflation, the Copom signals that it is acting preemptively. In other words, a prompt - and possibly smaller - adjustment in interest rates would prevent a larger increase in the future in order to keep inflation within its target range.

Going forward, we expect another 25 bp rate increase in December, with the Selic ending the year at 11.50%. For 2015, the scenario will be depend on the exchange rate and inflation developments and also on the new economic team. But, taking into account the inflationary pressures still present in the Brazilian economy, it is possible that the tightening cycle continues in the beginning of next year.

Mexico: No Change in Rates or in the Balance of Risks

The central bank decided to keep its policy rate at 3%, in line with our expectations and those of the market consensus. According to the press statement, the board views the balance of risks for both activity and inflation as unchanged from the previous meeting.

Domestically, the board noted that activity appears to have shown a moderate recovery during the third quarter of the year, lifted by solid external demand and improved internal demand. The board does not see any demand-driven inflationary pressures, however, as there is still significant slack in the economy.

In the board’s view, although inflation has remained above the upper bound of the target range, this has been a consequence of transitory factors. In fact, core inflation has remained tame, close to the center of the target range. The central bank added that surveyed inflation expectations have been stable, while breakeven inflation is very close to 3%. The board foresees inflation at 4.0% by year-end and at around 3% from mid-2015 on.

In the concluding remarks of the statement, the board reiterated that for upcoming decisions it will pay special attention to the evolution of the output gap and to Mexico’s monetary policy stance vis-à-vis that of the United States. 

Thus, the board’s view for the economy seems unchanged, which suggests that policy rate moves are unlikely in the short term. In our view, the central bank will stay on hold until the Fed starts to raise rates. For Mexico we see a tightening cycle starting by the end of 2Q15, with the policy rate reaching 3.5% before the end of next year.

Chile: Interest Rate Cut to 3.0% with a Move to a Neutral Bias

As expected, the Chilean central bank cut the policy rate by 25-bps to 3.0% in October. In the press statement announcing the decision, the board removed the easing bias. The interest rate has now reached the level suggested in the baseline scenario of the most recent monetary policy report. The decision was unanimous, according to the minutes.

Also according to the minutes, the board considered two “relevant” options: a cut of 25bp to 3.0% (and removing the easing bias); or to keep the policy rate at 3.25%. The chosen option of lowering the interest rate by 25 bps, and moving to a neutral bias, was consistent with the policy of gradual adjustments already undertaken, while dropping the bias was in line with the view that monetary policy was already providing sufficient aid to activity while still in support of inflation´s convergence to the target.

All in all, the guidance provided in the minutes is consistent with our scenario. We currently expect no further rate moves this year or in 2015. However, considering that the economy is yet to present convincing signs of a recovery and the lower oil prices, we think that the risks for additional easing in 2015 outweigh the risks for a hike.   

Colombia: Unanimous Decision to Hold Interest Rate 

The central bank decided to leave the policy rate at 4.5%, as expected by us and most market participants. Speaking to reporters, Governor Uribe indicated that it was a unanimous decision, as opposed to the previous decision in which one of the seven board members voted for a further rate hike.

In the concluding remarks of the statement, the board reemphasized that internal demand was growing strongly, amid an almost closed output gap and well-anchored inflation expectations. However, 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. This rational is the same as that which was used last month when the board also held the interest rate.

We expect no further rate moves this year (yearend rate of 4.5%). However, we still foresee rate hikes in 2015 (to 5.0%), as the current level of real rates is below neutral.

Peru: Policy Rate on Hold, But Further Reserve Requirement Easing

Peru’s central bank held the policy rate at 3.50% in October, as expected by us and the market. Later on in the month, the central bank lowered the reserve requirements for local currency to 10.0%, from 10.5%, effective from the start of November. Amid exchange-rate depreciation pressures, the central bank is avoiding reducing the interest-rate differential further.

Considering how weak the economy is, we expect the central bank to implement additional monetary easing through both its more traditional instrument (policy rate) and reserve requirements. We currently expect the interest rate to end the year at 3.25%, with no rate moves in 2015. However, financial market volatility will have to subside before the interest rate can be cut again. Recently the central bank has intervened in the exchange-rate market through non-deliverable forwards, adding to its issuance of dollar-linked certified of deposits and its interventions in the spot market.

4. Calendar of monetary policy decisions in November

*Source: Bloomberg



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