Global Monetary Policy Monitor January 017 Lower interest rates in South America In January, monetary policy decisions took place in 15 of the 33 countries that we monitor. On the tightening side, Turkey increased the upper-bound of the range for interest rates. In South America, interest rates are on a downward trend, although central banks in Colombia, Argentina and Peru chose to maintain their benchmark rates unchanged during the month. In Brazil, the central bank accelerated the pace of cuts in the Selic rate to 75 bps, in line with our call. In Chile, the central bank reduced rates by 5 bps. Contents 1. Policy rates: Historical table. Charts 3 3. Monetary policy in LatAm 3. Calendar of monetary policy decisions in February 5 We expect the easing process to continue in South America. In Brazil, we anticipate 75-bp cuts in the February and April meetings. Given that the inflation scenario is more benign than expected, we believe that the Selic rate will end 017 at 9.75%. In Chile, the easing cycle will probably add up to 100 bps. In Argentina, we see additional rate cuts, even though the inflation target is unlikely to be achieved (1% to 17%). On the other hand, Peru should maintain its interest rate unchanged. In Mexico, we expect the central bank to hike rates by 50 bps in February and then proceed to match increases by the U.S. Federal Reserve (i.e. three additional hikes of 5 bps before year-end). In February, there are important policy decisions in developed economies. The Fed maintained its benchmark rate and signaled that further increases will be data-dependent, contributing to sustain a favorable external environment for emerging economies. The Bank of England did not extend its asset-purchase program. Increases Interest-rate changes in January Cuts Brazil Turkey No change Indonesia Poland Chile Argentina Israel South Africa Colombia Japan South Korea Euro Zone Malaysia Canada Hungary Peru M.P Actions in January Date Country Decision Consensus 11-Jan Brazil -0.75 (interest rate) -0.50 19-Jan Chile -0.5 (interest rate) -0.5 -Jan Turkey +0.75 (upper band) +0.75 10 0 - - - - Central banks close to neutrality Number of CBs that reduced stimulus less number of CBs that increased stimulus -10 Oct-1 Jul-15 Apr-1 Jan-17 Source: Bloomberg, Itaú Please refer to the last page of this report for important disclosures, analyst and additional information. Itaú Unibanco or its subsidiaries may do or seek to do business with companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the single factor in making their investment decision.
Monetary Policy Stance* Tight Neutral-Tight Neutral Neutral-Loose Loose Brazil India Peru Turkey United States Colombia Poland Australia Switzerland Euro Zone Argentina Thailand South Africa Denmark United Kingdom Paraguay Philippines Israel Hungary Japan Indonesia Czech Republic Peru Norway Russia Malaysia Taiwan Sweden New Zealand Mexico China Canada Chile South Korea Movements to tighten in January Movements to loosen in January * Itaú assessment 1. Policy rates: Historical table Policy Rates (eop) May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-17 Emerging EM Asia China 1Y Lending Rate.35.35.35.35.35.35.35.35.35 India Repo Rate.50.50.50.50.50.5.5.5.5 South Korea Base Rate 1.50 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 Taiwan Offic. Disccount Rate 1.50 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 Malaysia O/N Rate 3.5 3.5 3.00 3.00 3.00 3.00 3.00 3.00 3.00 Thailand 1-day Repo 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 Indonesia BI Rate.75.50.50.50.50.50.50.50.50 Philippines Rev Repo 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 LATAM Brazil Selic O/N 1.5 1.5 1.5 1.5 1.5 1.00 13.75 13.75 13.00 Chile Disc Rate 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.5 Colombia Repo Rate 7.5 7.50 7.75 7.75 7.75 7.75 7.75 7.50 7.50 Mexico Repo Rate 3.75.5.5.5.75.75 5.5 5.75 5.75 Peru Reference.5.5.5.5.5.5.5.5.5 Argentina 1 month bill 3.5 30.75 30.5.5.75.75.75.75.75 Paraguay 1 days money rates 5.75 5.75 5.50 5.50 5.50 5.50 5.50 5.50 5.50 CEEMEA Czech Republic -wk Repo 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 Hungary -wk Dep 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 Poland 7-day interv 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 Russia Repo Rate 11.00 10.50 10.50 10.50 10.00 10.00 10.00 10.00 10.00 Turkey Effective rate 7.50 7.50 7.50 7.50 7.50 7.50.00.00.00 Israel Base Rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 South Africa Repo Rate 7.00 7.00 7.00 7.00 7.00 7.00 7.00 7.00 7.00 Developed US Base Rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.75 0.75 Euro Zone Base Rate 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 UK Base Rate 0.50 0.50 0.50 0.5 0.5 0.5 0.5 0.5 0.5 Japan Rate on Excess Reserves -0.10-0.10-0.10-0.10-0.10-0.10-0.10-0.10-0.10 Norway Deposit Rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 Sweden Base Rate -0.50-0.50-0.50-0.50-0.50-0.50-0.50-0.50-0.50 Denmark Repurchase Rate 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 Australia Cash Rate 1.75 1.75 1.75 1.50 1.50 1.50 1.50 1.50 1.50 New Zealand Cash Rate.5.5.5.00.00.00 1.75 1.75 1.75 Canada Lending Rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 Switzerland Libor Taget -0.75-0.75-0.75-0.75-0.75-0.75-0.75-0.75-0.75 *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. Page
. Charts 5 Interest Rates - Developed (%) 1 Interest Rates - Latam (%) 1 3 1 10 1 0-1 Nov-1 Sep-13 Jul-1 May-15 Mar-1 Jan-17 Norway Sweden Australia New Zealand Canada Switzerland Denmark UK Japan Euro Zone US Nov-1 Sep-13 Jul-1 May-15 Mar-1 Jan-17 Brazil Chile Colombia Mexico Peru 9 Interest Rates - Asia (%) 1 Interest Rates - CEEMEA (%) 1 7 1 1 5 3 1 Nov-1 Sep-13 Jul-1 May-15 Mar-1 Jan-17 China India South Korea Taiwan Malaysia Thailand Indonesia Philippines 10 0 Nov-1 Sep-13 Jul-1 May-15 Mar-1 Jan-17 Hungary Poland Russia Turkey Israel South Africa 3. Monetary policy in LatAm ARGENTINA Central Bank remains On-Hold, amid higher inflation expectations The Argentine central bank has kept the reference rate (7-day repo rate) on hold at.75% along January. The central bank adopted a new monetary policy framework in 017, setting the center of the 7-day repo-rate range as the monetary policy instrument and abandoning the 35-day Lebac rate that prevailed in 01. There is a range for the 7-day repo rate that is delimited by the central bank lending rate (active repo rate), at 5.75%, and the borrowing rate (passive rate), at.0%. In practical terms, the range sets a floor and a ceiling for the 1-day inter-banking lending rate. The central bank said in its latest monetary report that it chose the 7-day rate to avoid unnecessary interventions in the functioning of the one-day market. The spread of the range was set considering the advantages of reduced interest rate volatility and the cost of higher intervention in the market. Beginning in March, the central bank will announce its monetary decision on a bi-weekly basis, not weekly as it has been doing since the implementation of the inflation targeting scheme in September 01. The monetary policy stance remains tight. In the January monetary report, the central bank explained that the nominal rate is based on the expected inflationary trend according to central bank s surveys, its own estimates and breakevens. The nominal rate has been cut by 1,35 bps since March 01, to the current level of.75%. The reduction in nominal rates accompanied the disinflation process in H1 but kept the ex ante real interest rate relatively stable, according to the central bank s estimates (between % and 9%, annualized). Page 3
According to the latest survey on market expectations compiled by the central bank, participants expect a real interest rate of around 5% in the next months. In our view, the central bank has kept unchanged the reference rate mostly because inflation expectations increased recently, distancing further from the 1%-17% target range set by the central bank. We forecast inflation of % and a repo rate of 0% by December 017. BRAZIL Lower interest rates in 017 At its January monetary policy meeting, the central bank decided to make another interest rate cut, this time of 75 bps, bringing the Selic rate to 13.00%, in line with our expectations. In its statement and the meeting minutes, the committee signaled the possibility of at least one more 75-bp cut in February, but did not commit to delivering it. This strategy is justified, in our view, because inflation is falling faster and more broadly than expected and activity is failing to meet expectations in an environment where inflation expectations are anchored. The central bank also indicated that this movement is consistent with a front-loading of the monetary easing cycle but not, in principle, with a change in the total budget for monetary loosening. In our view, rising unemployment will continue to help bring down inflation, and given no further uncertainty abroad, this should allow the central bank to maintain a faster pace of monetary policy easing over the next several meetings. We expect two additional 75-bp cuts at the February and April meetings. We have lowered our year-end Selic rate forecast for 017 to 9.75% (previously 10%), as the inflationary scenario is more benign than we anticipated. Looking at 01, we believe that the continued downward trend in inflation and high levels of unemployment are consistent with further interest rate cuts. We expect a Selic rate of.50% at the end of 01. CHILE Expected start of the easing cycle As widely predicted, the central bank of Chile started the year with a 5 basis points rate cut after being on hold for a full year. The decision to lower the policy rate to 3.5% followed a sustained period of weak activity and faster than expected disinflation. The press release announcing the decision retained the same loosening bias introduced in the previous month and quantified in the Q1 Inflation Report (IPoM), supporting the expectation of more easing ahead. Inflation surprised to the downside at the close of 01. While short-term inflation expectations are near the lower bound of the %-% target range, the press release highlighted that inflation forecasts for the relevant horizon remain anchored. Meanwhile, the board outlined limited demand side pressures. We expect the central bank to cut the policy rate again this quarter, to 3.0%, and thereafter implement further easing later in the year as inflation wallows around %. We see the policy rate ending 017 at.5%, implying a 100-bp cycle (beyond the 50 bps envisioned in the Q1 IPoM). COLOMBIA A discontinuous easing cycle The central bank of Colombia surprised the market by leaving its policy rate unchanged in the first monetary policy meeting of the year. Following the earlier than expected rate cut in December, the market was near unanimous in its expectation for a 5 basis point rate cut. However, the central bank opted to leave the policy rate at 7.5%. The decision was once more by majority, with a swing from the -3 vote favoring a rate cut last month, to a -3 split favoring rates on hold. Juan José Echavarría led the meeting for the first time. According to Echavarría, the board agrees that there is a need for monetary easing, but there is divergence on the timing and speed of rate cuts. The board acknowledges that the real interest rate is above the historical average since 005 and that activity remains weak. However, the majority of the board appears concerned by inflation expectations. The central bank has been targeting 017 inflation within the %- % target range, but the latest survey of analysts puts the expectation for this year at.5%. Governor Page
Echavarría noted that he wants to reach the inflation target as soon as possible, with a 0% to 50% chance of hitting the % self-imposed target by yearend. A negative output gap and the fading impact of supply side shocks on inflation support the call for further easing ahead. Yet, as each rate cut will likely be data dependent, there exists a growing risk that fewer rate cuts than we currently expect materialize. Hence, the policy rate could end the year above our current 5.5% forecast. Having said that, the upcoming replacement of two of the seven board members could change the board s inclination for further monetary easing ahead. PERU Rates on-hold The Central Bank of Peru (BCRP) decided to maintain the reference rate at.5% in January s meeting, amid higher inflation forecasts. The Q1 inflation report, published previously, had already shown an increase in the inflation forecasts for 01 and 017. Inflation ended 01 at 3.%, above the Central Bank s target range for a third consecutive year. On the activity front, GDP growth slowed down significantly in Q1 (expanding at an average pace of.9% year-over-year in October and November, well below the.% print of 3Q1). Domestic demand has weakened. The statement had two relevant changes; namely, a less benign inflation outlook and an acknowledgement of weaker growth. First, it mentions that inflation will likely converge back to the target range by mid-017 (rather than decrease to % by the end of 017, as it read previously). In other words, this means the board believes inflation will stay above 3% (upper bound of the target range) for six more months. Second, the statement now acknowledges that GDP growth has slowed down. We still expect the BCRP to maintain the policy rate at.5% throughout 017 and 01. Inflation decreased to 3.1% in January, but is still hovering above the target range (1%-3%). Moreover, there are upward risks to inflation in the short-run, as adverse weather conditions (drought followed by abrupt flooding) threaten to disrupt agricultural supply. So the BCRP will likely remain watchful. Looking beyond that, we expect to economy to grow 3.% and.0% in 017 and 01, respectively, close to potential growth (around.0%), and inflation to converge to target range before the end of 017. Against this backdrop, it is likely that monetary policy will stay neutral (.5% is in the realm of what is considered the neutral rate).. Calendar of monetary policy decisions in February Date Country Monetary policy instrument Consensus* Previous -Feb United Kingdom** Bank of England Bank Rate 0.5% 0.5% 3-Feb Russia Key Rate 10.00% 10.00% 7-Feb Australia RBA Cash Rate Target 1.50% 1.50% -Feb Thailand BoT Benchmark Interest Rate 1.50% 1.50% -Feb Poland Poland Base Rate Announcement 1.50% 1.50% -Feb India RBI Repurchase Rate --.5% -Feb New Zealand RBNZ Official Cash Rate 1.75% 1.75% 9-Feb Philippines BSP Overnight Borrowing Rate -- 3.00% 9-Feb Mexico Overnight Rate -- 5.75% 9-Feb Peru Reference Rate --.5% 1-Feb Chile Overnight Rate Target -- 3.5% 15-Feb Sweden Riksbank Interest Rate -- -0.50% 1-Feb Indonesia Bank Indonesia 7D Reverse Repo --.75% -Feb South Korea BoK 7-Day Repo Rate -- 1.5% -Feb Brazil Selic Rate -- 13.00% -Feb Colombia Overnight Lending Rate -- 7.50% -Feb Hungary Central Bank Rate Decision -- 0.90% * Source: Bloomberg ** Decisions already made. Page 5
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