EM Monetary Policy Outlook – Latin America

Mkts Blog_Monetary Policy-LatAm

Easing cycles in Asia and EMEA stand in stark contrast to the tightening cycles seen in Latin America. Currency weakness played a large role in the high rates of regional inflation, as Latin America was the hardest hit region in terms of lower commodity prices. As such, the monetary tightening has been even more painful (but necessary to help tame inflation).

This is the last of our monetary policy outlooks for the different EM regions. Brazil was the first to tighten, and will likely be the first to ease this year. We believe most others in the region are nearing the end of their tightening cycles, but it’s too early to talk about easing yet.

Brazil – BCB has been on hold since its last 50 bp hike to 14.25% back in July 2015. IPCA inflation rose 9.39% y/y in March. While still above the 2.5-6.5% target range, this was the lowest since June 2015. If disinflation continues, we think that rate cuts are likely. However, we do not think a move will be seen while the impeachment process is ongoing. That rules out the April 27 COPOM meeting, while the June 8 is possible only if the Senate acts quickly to impeach. Perhaps the July 20 meeting is most likely. Latest central bank survey shows median expectations for policy rate at 13.38% by end-2016 and 12.25% by end-2017.

Chile – The central bank is in the midst of a tightening cycle but has been on hold since the last 25 bp hike to 3.5% in December. Inflation is turning lower, rising 4.5% y/y in March. While still above the 2-4% target range, continued disinflation gives the bank leeway to proceed cautiously. We think the tightening cycle is nearing an end. The latest central bank survey shows median expectations for only one 25 bp hike in 2016 and one 25 bp hike in 2017. Next policy meeting is May 17, no change expected then.

Colombia – The central bank is in the midst of a tightening cycle that started in April 2014. Since then, there has been total tightening of 325 bp that took the policy rate to 6.5%. However, inflation continues to rise. CPI rose 8.0% y/y in March, the highest since October 2001 and double the top of the 2-4% target range. The latest Bloomberg survey shows median expectations for only two more 25 bp hikes in H1 that would take the policy rate to 7.0%. Next policy meeting is April 29, and another 25 bp hike to 6.75% is expected then.

Mexico – The central bank is in the midst of a mini-tightening cycle but has been on hold since the last intra-meeting emergency 50 bp hike to 3.75% in February. CPI rose 2.7% y/y in March, below the 3% target and in the bottom half of the 2-4% target range. Barring a significant collapse in the peso, we think the tightening cycle is over for the time being. Officials have expressed concern about inflation pass-through from the weak peso, but we simply haven’t seen any yet. Next policy meeting is May 5, no change expected then.

Peru – The central bank is in the midst of a tightening cycle but has been on hold since the last 25 bp hike to 4.25% in February. Inflation is moderating, with CPI up 4.3% y/y in March. That’s the lowest since November but still above the 1-3% target range. The latest Bloomberg survey shows median expectations for only one 25 bp hike in Q2 and less than one 25 bp hike in H2. Next policy meeting is May 12, no change expected then.