Latam Charts: Doves Fly the Coop  

• Emerging-market central banks are shifting to more hawkish stances in the face of rising developed-market rates and capital-market volatility.

• In Latam, central banks in Brazil and Mexico have made the most dramatic turns, with Argentina expected to follow if its authorities get serious about locking down a new IMF arrangement. Domestic conditions in Colombia, Chile, and Peru imply a little more room to run before policy rates may need to rise as domestic economies recover.

SHIFTING MONETARY STANCES

Quickening vaccine rollouts, stronger evidence of further recoveries in many advanced economies, and rising developed-market (DM) yields continue to shift the terrain for emerging-market (EM) central banks haunted by the spectre of the 2013 “taper tantrum”. In recent weeks, both Russia’s and Turkey’s monetary authorities have taken actions to tighten their policy stances, while South Africa’s SARB indicated on Tuesday, March 23, that it may raise rates at the next meeting of its monetary policy committee (MPC). Future moves by the CBRT are, of course, up in the air since its recent surprise rate hike prompted President Erdogan to sack and replace the central bank’s governor.

Sentiment has started turning amongst Latam central banks as well, but the region splits into two groups when it comes to current stresses on EM monetary policymakers. In one set of countries—Brazil, Argentina, and to a lesser extent Mexico—already high and/or rising inflation merits a refresh of the monetary stance; and in another set of countries—Colombia, Chile, and Peru—inflation is comparatively low, but rising US rates and volatile international markets imply financial stability concerns amidst relatively low real rates and narrowing carry trades. That said, it’s worth recalling that we continue to forecast inflation to stay muted by historical standards across the four Pacific Alliance countries through 2022 (chart 1) and core price pressures remain well contained (chart 2). Recent FX and equity performances generally reflect the two Latam camps laid out above (tables 1 and 2).

Mexico faces the toughest set of trade-offs of Latam’s major economies. With the highest real rates (key economic chart 5, p. 3) and the slowest real GDP growth forecast for 2021 (see the March 12 Latam Charts report), an end—not just a pause—to Banxico’s easing cycle implies a further drag on the country’s recovery. In contrast, relatively low real rates in Brazil and Argentina (key economic chart 4, p. 3) imply additional space—albeit rapidly shrinking—to normalize monetary policy without immediately implying a brake on activity. In Colombia, Chile, and Peru, comparatively low real rates and low to moderate inflationary pressures imply a more favourable policy mix to sustain their recoveries.

I. Incipient hawks: where inflation pressures conflict with soft growth

• Brazil. As expected, the BCB’s Copom initiated the region’s first hiking cycle at its meeting on Wednesday, March 17, but it did so with even more gusto than we or most analysts had expected. In line with the consensus, we had expected a 50 bps hike in the Selic, but the Copom unanimously voted to deliver a 75 bps rise, its first hike in six years and its biggest upward move in over a decade, now under its newly-minted independence. The Copom also noted in its statement that it intended to raise rates again by the same delta at its next meeting unless inflation projections or risk assessments shift.
• Mexico. Banxico’s Board also took a step back from further easing at its Thursday, March 25, meeting where it voted unanimously to keep its overnight target rate at 4.00%. The hold had a hawkish tilt as it was a turnaround from the unanimous decision to cut by -25 bps from 4.25% to 4.00% at the Board’s February 11 meeting. Only two months before, the Board “paused” its easing cycle in a split 3–2 decision to hold at 4.25% at its December 17 meeting. Yesterday’s hold lacked a clear characterization that it was a temporary stay. Combined with the Board’s concern that both headline and core inflation moved above Banxico’s 2–4% y/y target range in the first half of March, the outcome of the meeting narrowed further the space for further monetary-policy easing in Mexico. Still, we believe the door isn’t entirely closed and that one more cut could be delivered during Q3-2021 given that we forecast Mexican real GDP growth at a relatively lacklustre 4.9% y/y in 2021 and the real policy rate remains amongst the highest in in Latam. But Banxico’s next steps likely depend more on international developments and financial stability concerns than on ongoing softness in domestic activity. Even if a further cut fails to materialize, our team in CDMX doesn’t expect a first hike until Q1-2022.
• Argentina. We’ve long expected the BCRA to initiate a fresh hiking cycle in a move away from monetizing deficits to tame inflation that is currently running at 40.7% y/y. Real policy rates are currently hovering around -2.5% and will need to be pushed back into positive territory over the course of 2021. We expected the BCRA to begin increasing its key policy rates during Q1-2021 to signal to the IMF that the country is serious about undertaking meaningful adjustment. But with few advances in talks with DC since last August’s sovereign debt restructuring, Vice-President Fernandez de Kirchner warning that Argentina won’t be able to repay the IMF, and President Fernandez pushing a gradual approach to negotiations, IMF deliberations are likely to blow through the already loose May target and stretch deeper into 2021. Consequently, moves by the BCRA to raise rates could be delayed even further.

II. Birds of a different feather: monetary molting can take more time

• Colombia. The BanRep Board followed its counterparts in Brazil and Mexico with a unanimous decision earlier today (March 26) to hold its benchmark policy rate at 1.75% after a split 5–2 decision at its January meeting that saw two members vote for a cut. Annual inflation remains well below the 3% target and inflation expectations are contained, but the BanRep staff raised its 2021 real GDP growth forecast from January’s 4.5% y/y to 5.2% y/y, which put a hawkish gloss on the decision. Our team in Bogota still expects a first hike in Q3-2021 from the BanRep, but this remains contingent on both international financial conditions and follow-through in April on the next steps in the government’s fiscal-reform program.
• Chile. The Board of Chile’s BCCh next rate decision falls on Tuesday, March 30, and a hold at 0.50% is nearly universally expected. The Board’s deliberations will have to balance rising DM yields against the possible hit to growth from new lockdowns in Santiago, waning demand effects from two rounds of pension withdrawals, and uncertainties around the constitutional renewal process. We continue to anticipate that the Board will look through recent international developments and put off a move to raise rates until Q2-2022.
• Peru. The BCRP Board next meets on rates on Thursday, April 8, and with inflation having subsided from a surprise at the beginning of the year, there is little pressure from the domestic economy to move the policy rate off its record-low 0.25% or to change the Board’s forward guidance. Our team in Lima continues to expect the BCRP to stay on hold through Q3-2022.

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