The surprise UK Brexit result is a game-changer for EM. While the ultimate economic impact has yet to be felt, markets are braced for bad news ahead. Likewise, we think that EM policymakers will prepare for a less friendly global growth and investment backdrop. As such, easing policy (or at least leaning more dovish) makes perfect sense until the global outlook becomes clearer. This week, we published our updated monetary policy outlooks for the three major EM regions. We started with EMEA and followed up with Asia. Today, we complete the series with Latin America.
We believe most of the central banks in this region were already shifting from hawkish move to a more neutral stance ahead of the Brexit vote. This was due in large part to inflation measures topping out in most countries, coupled with persistent downside risks to growth due to low commodity prices. With Brexit posing further risks to global growth, we think some central banks in this region could contemplate easing by year-end. Brazil was the first to tighten, and it will likely be the next to ease this year.
Argentina – After years of economic mismanagement made the country a pariah amongst global investors, Argentina is finally back on track and fully embracing orthodox policies under President Macri. Indeed, the government has announced that it will release a new CPI measure to replace the questionable one introduced in 2014 by his predecessor Fernandez. The appointment of Prat-Gay as Economy Minister and Sturzenegger as head of the central bank signaled a return to orthodox economic policies. Monetary policy was tightened in Q1 as the elimination of price controls led to a spike in inflation, and there are still upside risks to inflation when the new CPI measure is put into effect.
Brazil – BCB has been on hold since its last 50 bp hike to 14.25% back in July 2015. IPCA inflation rose 9% y/y in mid-June. While still above the 2.5-6.5% target range, this was the lowest since June 2015. However, IGP-M wholesale and PPI measures of inflation have started to accelerate again. The first quarterly inflation report from Goldfajn was quite hawkish, and recent developments suggest August 31 is the earliest it will cut rates rather than July 20. Latest central bank survey shows median expectations for policy rate at 13.25% (up from 13% the previous week).
Chile – The central bank has been on hold since the last 25 bp hike to 3.5% in December. Inflation is turning lower, rising 4.2% y/y in May. While still above the 2-4% target range, it is the lowest since November, and the continued disinflation gives the bank leeway to end the tightening cycle for now. The latest central bank survey shows median expectations for no more hikes in 2016, one 25 bp hike in 2017, and one 25 bp hike in 2018. Next policy meeting is July 14, no change is expected then.
Colombia – The central bank has been in an extended tightening cycle that started in April 2014. Since then, there has been total tightening of 425 bp that took the policy rate to 7.5% this month. Inflation continues to rise. CPI rose 8.2% y/y in May, the highest since January 2001 and more than double the top of the 2-4% target range. Minutes from the June meeting suggest that rate hikes are likely over for now, but we need to see inflation level out. Next policy meeting is July 29, and no action is expected then.
Mexico – The central bank has been on hold since the last intra-meeting emergency 50 bp hike to 3.75% in February. CPI rose 2.55% y/y in mid-June, below the 3% target and in the bottom half of the 2-4% target range. Banco de Mexico meets today. Median forecast is for a 25 bp hike to 4.0%, but the market is split. Of the 26 analysts polled by Bloomberg, 9 see no change, 12 see a 25 bp hike, and 5 see a 50 bp hike to 4.25%. It’s a close call but we think it will stand pat, especially with the peso firming from the post-Brexit lows.
Peru – The central bank has been on hold since the last 25 bp hike to 4.25% in February. Inflation is moderating, with CPI up 3.5% y/y in May. That’s the lowest since June 2015 but still above the 1-3% target range. The latest Bloomberg survey shows market are pricing in low odds for one 25 bp hike in H2. However, we think the tightening cycle has ended. The next policy meeting is July 14, no change is expected then.