Global Monetary Policy Monitor March 017 Interest rate paths diverge in Latin America In April, there were monetary policy decisions in 19 of the 33 countries we monitor. The number of central banks cutting interest rates exceeded the number of central banks hiking rates. Argentina's central bank hiked rates by 1.5 p.p. and Turkey s central bank increased the late liquidity overnight rate by 0.50 p.p., both surprising the market. On the expansionary side, Brazil s central bank cut rates by 1.0 p.p., as expected, and there were surprises in Chile (0.5 p.p. cut, while rates were expected to be held stable), Colombia and Russia (both with a 0.50 p.p. cut, more aggressive than the 0.5 p.p. expected cut in both countries). Contents 1. Policy rates: Historical table. Charts 3 3. Monetary policy in LatAm 3. Calendar of monetary policy decisions in April In May, we highlight the monetary policy meetings in Brazil, Peru and Mexico. We expect the Brazilian central bank to deliver another 1.0 p.p. interest rate cut, bringing the Selic rate to 10.5%, whereas we expect a 0.5 p.p. rate cut in Peru and a 0,5 p.p. hike in Mexico. Interest-rate changes in April Increases Cuts No change Argentina Brazil Turkey Australia Indonesia Chile Israel Canada Peru Colombia Euro Zone China Hungary Russia Japan India Poland Sweden South Korea M.P Actions in April Date Country Decision Consensus 11-Apr Argentina +1.50 (interest rate) 0.00 1-Apr Brazil -1.00 (interest rate) -1.00 13-Apr Chile -0.5 (interest rate) 0.00 -Apr Colombia -0.50 (interest rate) -0.5 -Apr Russia -0.50 (interest rate) -0.5 Throughout the month Turkey +0.50 (overnight rate) - 10 0 - - - - Central banks resume stimulus Number of CBs that reduced stimulus less number of CBs that increased stimulus -10 Jan-15 Oct-15 Jul-1 Apr-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.
Tight Neutral-Tight Neutral Neutral-Loose Loose Argentina Brazil South Africa Denmark Chile Colombia Indonesia Australia Hungary South Korea Mexico Malaysia Canada Peru United States Paraguay Poland China Turkey Japan Russia Phillippines Switzerland Norway India New Zealand Movements to tighten in April Movements to loosen in April Monetary Policy Stance* Israel Czec Republic Thailand Taiwan United Kingdom Sweden Euro Zone * Itaú assessment 1. Policy rates: Historical table Policy Rates (eop) Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-17 Feb-17 Mar-17 Apr-17 Emerging EM Asia China 1Y Lending Rate.35.35.35.35.35.35.35.35.35 India Repo Rate.50.50.5.5.5.5.5.5.5 South Korea Base Rate 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 Taiwan Offic. Disccount Rate 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 Malaysia O/N Rate 3.00 3.00 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.50.50.50.50.50.50.50.50.50 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 1.00 13.75 13.75 13.00 1.5 1.5 11.5 Chile Disc Rate 3.50 3.50 3.50 3.50 3.50 3.5 3.5 3.00.75 Colombia Repo Rate 7.75 7.75 7.75 7.75 7.50 7.50 7.5 7.00.50 Mexico Repo Rate.5.75.75 5.5 5.75 5.75.5.50.50 Peru Reference.5.5.5.5.5.5.5.5.5 Argentina 1 month bill.5.75.75.75.75.75.75.75.5 Paraguay 1 days money rates 5.50 5.50 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 10.50 10.00 10.00 10.00 10.00 10.00 10.00 9.75 9.5 Turkey Effective rate 7.50 7.50 7.50.00.00.00.00.00.00 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 0.75 0.75 0.75 1.00 1.00 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 0.5 0.5 0.5 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 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 New Zealand Cash Rate.00.00.00 1.75 1.75 1.75 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 Feb-13 Dec-13 Oct-1 Aug-15 Jun-1 Apr-17 Norway Sweden Australia New Zealand Canada Switzerland Denmark UK Japan Euro Zone US Feb-13 Dec-13 Oct-1 Aug-15 Jun-1 Apr-17 Brazil Chile Colombia Mexico Peru 9 Interest Rates - Asia (%) 1 Interest Rates - CEEMEA (%) 1 7 1 1 5 3 1 Feb-13 Dec-13 Oct-1 Aug-15 Jun-1 Apr-17 China India South Korea Taiwan Malaysia Thailand Indonesia Philippines 10 0 Feb-13 Dec-13 Oct-1 Aug-15 Jun-1 Apr-17 Hungary Poland Russia Turkey Israel South Africa 3. Monetary policy in LatAm ARGENTINA A one-off hike? The central bank kept the monetary rate (7-day repo) unchanged, at.5%, in its latest biweekly monetary policy meeting, after hiking the rate by 150 bps in early April. In the latest statement, the central bank indicated it was ready to act should inflation not resume a downward trend in May. Inflation picked up in the February-March period (.5% mom on average), mostly due to adjustments in regulated prices. However, the central bank s decision emanated from the fact that core inflation didn t fall between Q1 and 1Q17 as well as unfavorable high-frequency data for April. In fact, core inflation averaged 1.7% mom in both quarters, a level inconsistent with the inflation range target set for the year (1%-17%). The central bank announced a reserve accumulation target (through sterilized dollar purchases) that will be met mostly through hard-currency related to public sector debt issuance. While we note that last year the central bank was already accumulating a relevant part of the dollars generated by debt issuance abroad, the monetary authority has also purchased dollars in the exchange rate market recently. The central bank plans to increase gross international reserves to 15% of GDP, from its current level of 10%, in a period of one or two years (approximately USD 5.0 billion). While higher reserves are positive for the sovereign rating, dollar purchases will likely turn disinflation more challenging. Page 3
Looking ahead, we still expect the policy rate to end this year below the current level, as we expect inflation to moderate. However, we note that new rate increases in the short-term are possible.brazil Stronger interest cuts ahead There was no monetary policy decision in Brazil in March. The highlight was the 1Q Inflation Report (IR) published by the Brazilian central bank s Monetary Policy Committee (Copom). The IR revealed inflation forecasts that make room for stronger interest rate cuts ahead. In the report, the Copom indicated that the ongoing scenario and more widespread disinflation increase the chance of a moderate intensification in the pace of monetary easing. BRAZIL - Asymmetric risk for further acceleration of the easing pace in May In April, the Copom unanimously cut the Selic rate by 1.0 p.p. to 11.5%, as widely expected. Although the Copom considers that the current pace (1.0 p.p.) is adequate, the committee assesses that the current economic environment recommends monitoring the evolution of the determinants of the degree of frontloading. In the April meeting s minutes, the Copom reiterated that the extension of the cycle would continue. The Copom pointed out that the pace of monetary easing will depend on the extension of the intended cycle and the degree of its front-loading, which in turn will depend on the behavior of economic activity, other risk factors and inflation forecasts and expectations. The minutes also signaled asymmetry on future monetary policy movements. An important section reveals that the committee considered a more aggressive move than the 1.0 p.p. cut delivered, but ended up opting for "moderate" acceleration, given the forward looking nature of policymaking and the uncertainty around the scenario. We expect the Copom to deliver another 1.0 p.p. cut at its next policy meeting on May 30 and 31. However, renewed frustration with activity data and, to a lesser extent but also relevant, a faster decline in inflation expectations and the advance of economic reforms in Congress might lead the Copom to accelerate the easing pace some more. CHILE Appetite for - limited additional easing ahead The board of the central bank of Chile unanimously decided to cut its policy rate by 5-bps to.75% at its April monetary policy meeting. The central bank initiated an easing cycle in January, strategically pausing in February, and resuming the cycle in March. The press release communicating the decision retained an easing bias stating the board will evaluate the need for "some" additional monetary stimulus. All board members viewed domestic activity in line with the scenario outlined in the most recent Inflation Report, but acknowledged a sharper-than-expected deterioration of the labor market. The board noted that if falling waged employment and wages endured, they could have a negative effect on consumption ahead. These comments reaffirm our view that the evolvement of the labor market was the likely trigger of the rate cut last month, and would play a similar role going forward. Meanwhile, the evolution of inflation was not a source of concern. Overall, we view that the central bank has a clear, but certainly limited, appetite for additional easing. We expect the policy rate to reach.50% before the end of the current quarter and remain there until the end of the year. However, we acknowledge that if activity, particularly through the labor market, disappoints further, additional easing might be on the cards. Page
COLOMBIA Growth concerns lead to a more aggressive rate cut The central bank of Colombia cut the policy rate by 50 bps, to.50%, at its April meeting. The decision was once again by split vote, with four co-directors falling in the majority, while the remaining two co-directors opting for a 5-bp cut. This was the sixth non-unanimous consecutive decision, with the move surprising twothirds of Bloomberg s respondents, as well as us, who expected a 5bp rate cut. The disappointing activity and increased risk of an excessive slowdown supported the move, while core inflationary pressure - previously raised as an area of unease - persists. The balancing act between these factors means the speed of monetary easing will remain data-dependent. Flagging activity convinced most in the board of a more aggressive action at this meeting. The press release announcing the decision highlights the disappointing activity in 1Q17 (industrial production, retail sales and consumer confidence), leading the technical staff to lower its 017 growth forecast to 1.%, from % previously (% in 01). Meanwhile, inflation is evolving in line with expectations, led by the dilution of previous supply-side shocks. In fact, the central bank s medium-term inflation forecast has declined amid the recent disinflation. We expect the central bank to continue lowering the policy rate, but the pace of rate cuts will be data dependent. We see the policy rate ending the year at 5.5% (7.50% in 01). MEXICO More hikes in the offing With the recent exchange rate appreciation, the central bank found room to reduce the pace of rate hikes. The quarterly Inflation Report marked a turning point in the Central Bank s guidance by stating that tightening aggressively could be inefficient and costly for economic activity. In the week after, Banxico s board unanimously decided to smooth the pace of monetary tightening by hiking 5-bps (to.50%), departing from the last six policy moves (50-bps). Moreover, in April, Governor Cartsens told the press that Banxico might not necessarily follow the Fed in the medium-term. However, the latest inflation numbers, combined with benign activity data and the expectation of new hikes by the Fed, mean that additional rate increases are likely. Headline inflation is yet to peak and the behavior of diffusion indexes (9% of items in the CPI basket showing inflation higher or equal than %) and service inflation suggests second-round effects are materializing. In this context, the central bank still sees the balance of risks for inflation as tilted to the upside. Moreover, the central bank continues to highlight the interest rate differential with the U.S. as a key variable to monitor. We still expect Banxico to take the reference rate to 7.0% in 017, although we now believe that the next rate hike will come in May (rather than June). To be sure, it will be hard for Banxico s board not to hike given the last high inflation prints, and to less extent the resilience of activity in 1Q17. Afterwards, the next hike will probably come in June, following the Fed. PERU A close call The Central Bank of Peru (BCRP) decided to keep the reference rate at.5% in April in line with our call and the market consensus but has provided unequivocal guidance that it plans to cut rates. Following a 1p.p. cut of local currency reserves requirements (to 5%), and a sharp downward revision to its GDP growth forecast for 017 (to 3.5%, from.3% previously) presented in the 1Q17 Inflation Report, the central bank introduced an easing bias. This doesn t come as a surprise because in late March when it became clear that the coastal El Niño would have a large impact on inflation and activity Governor Velarde told the press that rate cuts are likely. Page 5
The latest statement featured major changes. The policy bias sentence now reads: the Board is watchful of inflation and its determinants, especially the reversion of supply shocks, to loosen monetary policy in the shortterm. However, the new phrasing mentions that inflation expectations are close to the upper bound of the tolerance interval (around the -percent target), rather than on a downward trend as it stated before, indicating that easing may not come so soon. We expect the first rate cut to come in May. In April, consumer prices fell, with annual inflation decreasing to 3.7% (from % in March). Meanwhile inflation expectations for the medium-term have stabilized. We expect the BCRP to deliver two rate cuts in 017, taking the policy rate to 3.75% (from.5% currently), with a bias to do more rather than less.. Calendar of monetary policy decisions in May Date Country Monetary policy instrument Consensus* Previous -May Australia** RBA Cash Rate Target 1.50% 1.50% 3-May United States** FOMC Rate Decision (Upper Bound) 1.00% 1.00% -May Norway** Deposit Rates 0.50% 0.50% -May Czech Republic** Repurchase Rate 0.05% 0.05% 10-May New Zealand RBNZ Official Cash Rate 1.75% 1.75% 11-May Philippines BSP Overnight Borrowing Rate -- 3.00% 11-May United Kingdom Bank of England Bank Rate -- 0.5% 11-May Peru Reference Rate --.5% 1-May Malaysia BNM Overnight Policy Rate 3.00% 3.00% 17-May Poland Poland Base Rate Announcement -- 1.50% 17-May Indonesia Bank Indonesia 7D Reverse Repo --.75% 1-May Mexico Overnight Rate --.50% 1-May Chile Overnight Rate Target --.75% 3-May Hungary Central Bank Rate Decision 0.90% 0.90% -May Thailand BoT Benchmark Interest Rate 1.50% 1.50% -May Canada Bank of Canada Rate Decision 0.50% 0.50% -May South Korea BoK 7-Day Repo Rate -- 1.5% 5-May South Arfrica SARB Announce Interest Rate -- 7.00% -May Colombia Overnight Lending Rate --.50% 9-May Israel Base Rate -- 0.10% 31-May Brazil Selic Rate -- 11.5% * Source: Bloomberg ** Decisions already made Macro Research Itaú Mario Mesquita Chief Economist Tel: +5511 370-9 Click here to visit our digital research library. Page
Relevant Information 1. This report has been prepared and issued by the Macro Research Department of Banco Itaú Unibanco S.A. ( Itaú Unibanco ). This report is not a product of the Equity Research Department of Itaú Unibanco or Itaú Corretora de Valores S.A. and should not be construed as a research report ( relatório de análise ) for the purposes of the article 1 of the CVM Instruction NR. 3, dated July 0, 010.. This report aims at providing macroeconomics information, and does not constitute, and should not be construed as an offer to buy or sell, or a solicitation of an offer to buy or sell any financial instrument, or to participate in any particular trading strategy in any jurisdiction. The information herein is believed to be reliable as of the date on which this report was issued and has been obtained from public sources believed to be reliable. Itaú Unibanco Group does not make any express or implied representation or warranty as to the completeness, reliability or accuracy of such information, nor does this report intend to be a complete statement or summary of the markets or developments referred to herein. Opinions, estimates, and projections expressed herein constitute the current judgment of the analyst responsible for the substance of this report as of the date on which it was issued and are, therefore, subject to change without notice. Itaú Unibanco Group has no obligation to update, modify or amend this report and inform the reader accordingly. 3. The analyst responsible for the production of this report, whose name is highlighted in bold, hereby certifies that the views expressed herein accurately and exclusively reflect his or her personal views and opinions and were prepared independently and autonomously, including from Itaú Unibanco, Itaú Corretora de Valores S.A. and other group companies.. This report may not be reproduced or redistributed to any other person, in whole or in part, for any purpose, without the prior written consent of Itaú Unibanco. Additional information on the financial instruments discussed in this report is available upon request. Itaú Unibanco and/or any other group companies is not, and will not be liable for any investment decisions (or otherwise) based on the information provided herein. Additional Note to reports distributed in: (i) U.K. and Europe: The sole purpose of this material is to provide information only, and it does not constitute or should be construed as a proposal or request to enter into any financial instrument or to participate in any specific business strategy. The financial instruments discussed in this material may not be suitable for all investors, and are directed solely at Eligible Counterparties and Professionals as defined by the Financial Conduct Authority. This material does not take into consideration the objectives, financial situation or specific needs of any particular client. Clients must obtain financial, tax, legal, accounting, economic, credit and market advice on an individual basis, based on their personal characteristics and objectives, prior to making any decision based on the information contained herein. By accessing the material, you confirm that you are aware of the laws in your jurisdiction relating to the provision and sale of financial service products. You acknowledge that this material contains proprietary information and you agree to keep this information confidential. Itau BBA International plc (IBBAInt) exempts itself from any liability for any losses, whether direct or indirect, which may arise from the use of this material, from its content and is under no obligation to update the information contained in this document. Additionally, you confirm that you understand the risks related to the financial instruments discussed in this material. Due to international regulations not all financial instruments/services may be available to all clients. You should be aware of and observe any such restrictions when considering a potential investment decision. Past performance and forecast are not a reliable indicator of future results. The information contained herein has been obtained from internal and external sources and is believed to be reliable as of the date in which this material was issued, however IBBAInt does not make any representation or warranty as to the completeness, reliability or accuracy of information obtained by third parties or public sources. Additional information relative to the financial products discussed in this material is available upon request. Itau BBA International plc registered office is 0th floor, 0 Primrose Street, London, United Kingdom, ECA EW and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (FRN 5755) Itau BBA International plc Lisbon Branch is regulated by Banco de Portugal for the conduct of business. Itau BBA International plc has representative offices in France, Germany, Spain which are authorised to conduct limited activities and the business activities conducted are regulated by Banque de France, Bundesanstalt fur Finanzdienstleistungsaufsicht (BaFin), Banco de España respectively. For any queries please contact your relationship manager; (ii) U.S.A: Itau BBA USA Securities, Inc., a FINRA/SIPC member firm, is distributing this report and accepts responsibility for the content of this report. Any US investor receiving this report and wishing to effect any transaction in any security discussed herein should do so with Itau BBA USA Securities, Inc. at 77 Fifth Avenue, 50th Floor, New York, NY 10153; (iii) Asia: This report is distributed in Hong Kong and Japan by Itaú Asia Securities Limited, which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities) regulated activity. Itaú Asia Securities Limited accepts all regulatory responsibility for the content of this report. In Hong Kong, any investors wishing to purchase or otherwise deal in the securities covered in this report should contact Itaú Asia Securities Limited at 9th Floor, Two IFC, Finance Street Central, Hong Kong; (iv) Middle East: This report is distributed by Itau Middle East Limited. Itau Middle East Limited is regulated by the Dubai Financial Services Authority and is located at Suite 305, Level 3, Al Fattan Currency House, Dubai International Financial Centre, PO Box 03, Dubai, United Arab Emirates. This material is intended only for Professional Clients (as defined by the DFSA Conduct of Business module) no other persons should act upon it; (v) Brazil: Itaú Corretora de Valores S.A., a subsidiary of Itaú Unibanco S.A authorized by the Central Bank of Brazil and approved by the Securities and Exchange Commission of Brazil, is distributing this report. If necessary, contact the Client Service Center: 00-3131* (capital and metropolitan areas) or 000-7-3131 (other locations) during business hours, from 9 a.m. to p.m., Brasilia time. If you wish to re-evaluate the suggested solution, after utilizing such channels, please call Itaú s Corporate Complaints Office: 000-570-0011 (on business days from 9 a.m. to p.m., Brasilia time) or write to Caixa Postal 7.00, São Paulo-SP, CEP 031-971.* Cost of a local call. Page 7