Chile Maintains Rate, But May Ease Again If Trends Persist

Chile’s central bank left its monetary policy rate steady at 2.50 percent but said it may be necessary to “extend the current monetary stimulus” if the current trend of low inflation continues, with the magnitude of any easing to be assessed in the next quarterly monetary policy report.

The Central Bank of Chile, which surprised economists by cutting its rate by 50 basis points in June, said information since its last policy report reflected “increased risks associated with the timely convergence of inflation to the target,” in particular inflation for services, and the “risks surrounding the future evolution of activity and demand, in a context of high external uncertainty.”

At today’s board meeting a majority of its members voted to maintain the rate but board member Pablo Garcia voted to lower the rate by 25 basis points.

The central bank publishes a monetary policy report every quarter and in the June report the forecasts for economic growth, investment and domestic demand for this year were lowered.

Economic growth this year was seen between 2.75 percent and 3.5 percent, down from a range of 3.0 percent to 4.0 percent in the March report, and 2018’s 4.0 percent.

In the first quarter of this year Chile’s gross domestic product stagnated from the previous quarter and on an annual basis GDP growth eased to 1.6 percent from 3.6 percent in the fourth quarter of last year.

Data for the second quarter point to “less than expected dynamism,” the central bank said, due to a poor performance by the mining sector and additional downside risks may be expected in coming months.

Exports had also contracted more than expected due to weakness in its trading partners, with growth expectations in the EES survey being lowered for this year and next year.

Chile’s inflation rate was steady at 2.3 percent in June and May, below the bank’s 3.0 percent target, and inflation expectations for the end of this year and in 12 months have declined.

Chile’s peso has risen slightly this year and was trading at 683 to the U.S. dollar today, up 1.6 percent since the start of the year.

The Central Bank of Chile released the following statement:

In its Monetary Policy Meeting, the Board of the Central Bank of Chile decided to hold the monetary policy interest rate at 2.5%. The decision was adopted by the majority of its members, with the votes of Governor Mario Marcel, Vice-Governor Joaquín Vial, and Board members Rosanna Costa and Alberto Naudon. Board member Pablo García voted for lowering the policy rate by 25 basis points, to 2.25%.

On the external front, the expectations of a more expansionary monetary policy stance have been consolidating in various economies, both developed and emerging, some of which have already taken action in that direction. This has occurred in a context in which inflation remains well contained in the developed world and there is ongoing general concern over the performance of the global economy. Incoming data from manufacturing, investment and foreign trade have brought a negative surprise in several economies, contrasting with information about employment, consumption and services, which shows no major changes in the main economies. In this scenario, long- term interest rates posted new declines, the stock markets increased and risk premiums tightened, while capital flows into emerging economies increased at the margin and the dollar tended to weaken against other currencies. Commodities have seen limited price increases since the last Meeting, copper and oil included.

The evolution of the domestic financial market has been dominated by more expansionary monetary policy in Chile and by external developments. Peso- denominated long-term interest rates have dropped, stock returns have risen and risk indicators have declined. The exchange rate, with some volatility, is lower than it was at the last Meeting. In the credit market, housing loans dynamism is similar to the one of the past few months, while commercial and consumer loans have slowed down slightly. Meanwhile, interest rates on commercial and mortgage loans have diminished further, so they continue around record lows. The Bank Lending Survey of the second quarter reflects fairly stable supply conditions, while demand appears to be somewhat weaker in large companies and with moderate upswings in the segments of construction firms and housing financing.

Regarding activity and demand, the information at hand for the second quarter points to somewhat less than expected dynamism, partly due to poor performance of mining and some specific factors. Some qualitative background indicators suggest that additional downside risks may be expected for the coming months. About consumption, imports of consumer goods have slowed down and consumers’expectations have deteriorated significantly (IPEC). The labor market shows no significant changes, the unemployment rate remains around 7% and various indicators point to increasing job creation. On the investment side, the favorable evolution of some elements related to business services contrasts with the moderation of sales of construction materials and business expectations (IMCE), which are still slightly below their neutral levels. On the other hand, exports contracted beyond expectations, partly reflecting the weakness of some trading partners. In this context, the growth expectations contained in the Economic Expectations Survey (EES) decreased for both this year and next.

The annual CPI variation remained at 2.3% in June, while core inflation (CPIEFE) continued to hover around 2% annually. Among core inflation components, it is worth noting the widespread drop in the prices of services, more closely linked to capacity gaps and labor costs. On the contrary, the goods component of the CPIEFE posted unexpected growth, although largely driven by tourist packages. As for inflation expectations, there is a decrease for both the end of 2019 and one year ahead. For two years ahead, while the EES median remained at 3%, the median of the Financial Brokers Survey dropped to 2.8%.

The Board considers that information accumulated since the publication of the last Monetary Policy Report reflects increased risks associated with the timely convergence of inflation to the target over the policy horizon. In particular, due to lower services inflation figures, whose persistence is high relative to other CPI components and the risks surrounding the future evolution of activity and demand, in a context of high external uncertainty. In case these tendencies persist, the Board estimates that it will be necessary to extend the current monetary stimulus, in a magnitude to be assessed in the next Monetary Policy Report. Accordingly, it reiterates its will to conduct monetary policy with flexibility, so that projected inflation stands at 3% in the two- year horizon.

The minutes of this Monetary Policy Meeting will be published at 8:30 hours Friday 2 August 2019. The next Monetary Policy Meeting will take place on 3 September and the statement thereof will be published at 18 hours the same day.

This article originally appeared on CentralBankNews.info on July 18, 2019. It is reproduced here with permission from the author.

Dominican Rep. Raises Rate 25 bps on Rising Inflation

This article originally appeared on CentralBankNews.info on July 26, 2018. It is reproduced here with permission from the author.

The Central Bank of the Dominican Republic (BCRD) raised its monetary policy rate by 25 basis points to 5.50 percent and said it would continue to withdraw the monetary stimulus from last year as long as economic growth continues to generate inflationary pressure.

It is the first rate hike by the BCRD since April 2017 and the first change in rates since August last year when the rate was slashed by 50 basis points.

In addition to raising the monetary policy interest rate, the central bank raised the deposit rate by 25 basis points to 4.0 percent and the rate on its permanent expansion facilities (repos) by the same amount to 7.0 percent.

BCRD said it changed its monetary policy to achieve its inflation goal as inflation was forecast to gradually rise due to higher oil prices, pressure from domestic demand and increased uncertainty in international financial markets.

In a statement from July 24, the BCRD noted that cumulative inflation in the first six months of this year was 1.43 percent so the annual inflation rate in June had risen to 4.63 percent, above the bank’s midpoint target range of 4.0 percent, plus/minus 1 percentage point.

Inflation in the Dominican Republic has risen steadily since 3.32 percent in February and June inflation was the highest rate since October 2013.

As the United States continues to normalize its monetary policy, BCRD said international financial conditions are becoming less favorable and this has increased risk premiums and long-term interest rates for emerging economies.

“The higher interest rates in the US have also generated an appreciating trend in the dollar, which together with higher oil prices, has contributed to an increase in the depreciation of the currencies of developing countries,” BCRD said.

The Dominican peso has been relatively stable since March, in contrast to a steady depreciation against the U.S. dollar in the last decade.

The peso was trading at 49.76 to the U.S. dollar today, down 4 percent this year.

However, despite the changing international financial conditions, BRCR said the economy in emerging countries remains in a positive trend and in Latin America, with the exception of Venezuela, there would be positive growth of 2.0 percent this year despite the moderation seen in such large economies as Argentina and Brazil.

Domestically, the economy is also continuing to evolve in a favorable manner, with the monthly indicator of economic activity (IMAE) showing cumulative growth of 6.6 percent in the first five months of the year. The trend cycle rose by an annual 6.9 percent in May, showing that the economy would continue to grow above potential in the rest of this year.

“To the extent that this growth path is maintained and generates pressures on future domestic prices, monetary policy would continue to move towards the withdrawal of the monetary stimulus launched last year,” BCRD said, adding “in this way, important deviations in the differential between domestic interest rates and those of the US would be avoided.”

This article originally appeared on CentralBankNews.info on July 26, 2018. It is reproduced here with permission from the author.

Canada Raises Rate Another 25 bps and Sees Further Hikes

Canada’s central bank raised its monetary policy rate by another 25 basis points to 1.50 percent and expects further rate hikes will be needed to keep inflation near its target though it will continue to be guided by the level of economic activity and inflation.

The Bank of Canada (BOC) has now raised its key rate, the target for the overnight rate, four times and by a total of 100 basis points in the last 12 months.

“Governing council expects that higher interest rates will be warranted to keep inflation near target and will continue to take a gradual approach, guided by incoming data,” the BOC said, confirming financial markets’ expectations that interest rates in Canada will continue to rise.

It is the BOC’s second rate hike this year and was expected by most economists following the central bank’s guidance in May in which it said economic data had reinforced the governing council’s view that “higher interest rates will be warranted to keep inflation near target.”

Today’s rate hike comes against a backdrop of growing volatility in global financial markets in response to concern over United States trade protectionism, including an increase in tariffs between Canada and the U.S., and negotiations over the North American Free Trade Agreement (NAFTA) that original went into effect in 1994.

In the July monetary policy report, the BOC estimated that uncertainty over future trading relationships and U.S. trade actions already implemented will subtract about 0.67 percent from Canada’s Gross Domestic Product by the end of 2020, an amount BOC described as “modest.”

U.S. tariffs on steel and aluminum imposed on June 1 is estimated to reduce Canadian exports by C$3.6 billion, or 0.6 percent, and mostly be felt in the second half of this year.

The impact of Canada’s countermeasures are expected to reduce imports by C$3.9 billion, or 0.6 percent, by raising the cost of users of steel, aluminum and iron, temporarily boosting inflation by about 0.1 percentage point until the third quarter of 2019.

Tensions and uncertainty over trade are taking place against still-solid global growth that has boosted oil prices and stronger-than-expected U.S. growth that has weakened the Canadian dollar while the economy is operating close to capacity.

The BOC raised its forecast for Canada’s economic growth in 2019 to 2.2 percent from April’s forecast of 2.1 percent and the 2020 forecast to 1.9 percent from 1.8 percent.

The forecast for growth this year was left at 2.0 percent, down from 3.0 percent in 2017, with the composition of growth shifting away from household spending towards business investment and exports as households adjust to higher interest rates and tighter mortgage regulations.

Inflation is seen remaining close to the bank’s target of 2.0 percent though it will accelerate to 2.5 percent in the third and fourth quarters of this year and average 2.4 percent for the year. It will then ease in 2019 but still average 2.2 percent and then 2.1 percent in 2020.

The Canadian dollar briefly rose on BOC’s rate hike but then eased to trade at 1.314 to the U.S. dollar, down 4.3 percent this year.

The Bank of Canada issued the following statement:

“The Bank of Canada today increased its target for the overnight rate to 1 ½ per cent. The Bank Rate is correspondingly 1 ¾ per cent and the deposit rate is 1 ¼ per cent.

The Bank expects the global economy to grow by about 3 ¾ per cent in 2018 and 3 ½ per cent in 2019, in line with the April Monetary Policy Report (MPR). The US economy is proving stronger than expected, reinforcing market expectations of higher policy rates and pushing up the US dollar. This is contributing to financial stresses in some emerging market economies. Meanwhile, oil prices have risen. Yet, the Canadian dollar is lower, reflecting broad-based US dollar strength and concerns about trade actions. The possibility of more trade protectionism is the most important threat to global prospects.

Canada’s economy continues to operate close to its capacity and the composition of growth is shifting. Temporary factors are causing volatility in quarterly growth rates: the Bank projects a pick-up to 2.8 per cent in the second quarter and a moderation to 1.5 per cent in the third. Household spending is being dampened by higher interest rates and tighter mortgage lending guidelines. Recent data suggest housing markets are beginning to stabilize following a weak start to 2018. Meanwhile, exports are being buoyed by strong global demand and higher commodity prices. Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors. Overall, the Bank still expects average growth of close to 2 per cent over 2018-2020.

CPI and the Bank’s core measures of inflation remain near 2 per cent, consistent with an economy operating close to capacity. CPI inflation is expected to edge up further to about 2.5 per cent before settling back to 2 per cent by the second half of 2019. The Bank estimates that underlying wage growth is running at about 2.3 per cent, slower than would be expected in a labour market with no slack.

As in April, the projection incorporates an estimate of the impact of trade uncertainty on Canadian investment and exports. This effect is now judged to be larger, given mounting trade tensions.

The July projection also incorporates the estimated impact of tariffs on steel and aluminum recently imposed by the United States, as well as the countermeasures enacted by Canada. Although there will be difficult adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest.

Governing Council expects that higher interest rates will be warranted to keep inflation near target and will continue to take a gradual approach, guided by incoming data. In particular, the Bank is monitoring the economy’s adjustment to higher interest rates and the evolution of capacity and wage pressures, as well as the response of companies and consumers to trade actions. ”

This article originally appeared on CentralBankNews.info and is reproduced here with permission from the author.

Trinidad & Tobago raises rate first time since Dec. 2015

Trinidad and Tobago’s central bank raised its benchmark repo rate by 25 basis points to 5.0 percent, noting growth led by the energy sector, a pickup in private sector credit, still low inflation, and the implications of higher U.S. interest rates for the country’s external balance.

It is the first change in rates by the Central Bank of Trinidad and Tobago (CBTT) since December 2015 and continues a tightening cycle that began in September 2014. Since then, rates have been raised 225 basis points.

The expansion of Trinidad & Tobago’s energy sector is expected to spill over into non-energy activities and private sector credit growth rose in April by an annual 5.8 percent and a rebound in business credit suggest that private sector confidence could be strengthening, CBTT said.

Rising U.S. interest rates and stable rates in Trinidad and Tobago has pushed the yield differential between 3-month TT and U.S. bonds to minus 74 basis points and plans by the U.S. Federal Reserve to raise rates further would widen the interest rate differential if TT rates remain unchanged.

Inflation in Trinidad and Tobago eased to 0.8 percent in March from 0.9 percent in February.

The Central Bank of Trinidad and Tobago issued the following statement:

“Global growth prospects continued to strengthen since the last meeting of the Monetary Policy Committee (MPC) in March 2018. The International Monetary Fund, in its April 2018 World Economic Outlook, raised projections for global growth in 2018 and 2019. However, the escalation of trade frictions among major economies could undermine the growth momentum moving forward. Meanwhile, some emerging market and developing economies (EMDE) are facing tighter financial conditions, accelerated capital outflows and adverse currency movements as the United States Federal Reserve (US Fed) normalizes its monetary policy. In June 2018 the Fed hiked its key policy rate for the second time in 2018.

On the domestic front growth in the first five months of 2018 has been concentrated in the energy sector. This is expected to spill over into non-energy activities, and there are already encouraging signs in distribution and a recovery of business credit, although construction remains sluggish. Meanwhile, headline inflation continued to be low, measuring 1.1 per cent (year-on-year) in April 2018, up from 0.8 per cent in the previous month.

Private sector credit growth maintained its positive momentum, rising in April by 5.8 per cent (year-on-year). Lending continued to be driven by loans for refinancing and debt consolidation, while some rebound in business credit suggests that private sector confidence could be strengthening. Further, the commercial banks’ weighted average lending rate has been falling since December 2017 and stood at 8.15 per cent at end-March 2018. Liquidity levels trended lower but remain comfortable.

Rising interest rates in the US combined with relatively stable rates domestically have pushed the TT-US yield differential on three-month Treasuries further below parity. The differential currently stands at -74 basis points. The US Fed has signaled that further hikes are planned in the context of the solid US growth outlook. Should this materialize it could further widen the negative TT-US interest rate differential if domestic interest rates remain unchanged.

The MPC in its deliberations noted the growth in early 2018 led by the energy sector, the pickup in private sector credit and the still low inflation. The Committee also took note of the implication of the strong upward trajectory of external interest rates, particularly in the US, for Trinidad and Tobago’s external balance. Taking all factors into consideration, the MPC took the decision to raise the repo rate by 25 basis points to 5.00 per cent. The Bank will continue to carefully monitor and analyze international and domestic developments.

The next Monetary Policy Announcement is scheduled for September 28, 2018.”

This article originally appeared on CentralBankNews.info and is reproduced here with permission from the author.

Argentina Maintains Rate at 40 Percent After 3 Rapid-Fire Hikes

Argentina‘s central bank left its monetary policy rate at 40 percent after three sharp rate hikes in 12 days and said it expects to keep real interest rates at a significantly higher level than in the past as long as inflation remains above its forecast for this year and emerging markets are facing a scenario of greater instability.

The Central Bank of the Argentine Republic (BCRA) has raised its key rate by a massive 12.75 percentage points since April 27 in an effort to shore up the exchange rate of the peso and force down inflation that is far in excess of the government’s target for 2018 of 15 percent.

After the latest 675 basis point rate hike on Friday, May 4, there were signs of peso stabilization but earlier today it continued to tumble until Argentina’s president, Mauricio Macri, announced on television that his government was seeking a line of credit from the International Monetary Fund (IMF) to “avoid a crises like the ones we have faced before in our history.”

Macri’s decision to turn to the IMF will bring back memories for many Argentines who still blame the Washington D.C.-based institution for letting the country’s debt soar and trigger the 2001 debt crises by allowing it keep an exchange rate that pegged the peso to the U.S. dollar.

Macri, who is facing election in October 2019, took office in December 2015 promising to end the country’s isolation from international financial markets, tackle high government spending on subsidies, and lower the fiscal deficit and inflation.

Christine Lagarde, IMF managing director, welcomed Macri’s statement and said discussions had been initiated with Argentina on how its economy could be strengthened and “these will be pursued in short order.”

After spiking to 23.14 to the U.S. dollar, the peso ended today around 22.35 to the dollar, down 9.4 percent since April 26, the day before the first of three rate hikes. Compared with the start of this year the peso has lost 16.8 percent and compared with the start of 2017 it is down almost 30 percent.

In today’s longer-than-usual statement, the central bank noted the recent instability in the currency market, saying the normal menu of options available to a central bank include allowing the currency to depreciate, carry out interventions to avoid a currency overreaction by investors and raising interest rates to moderate the inflationary impact.

BCRA noted its initial decision was to intervene in the foreign exchange market to contain the depreciation followed by letting the peso slide as it became convinced the pressure on the peso was not just an isolated episode but part of a deeper shock to emerging market currencies.

At the same time, the central bank raised its monetary policy rate by 1,275 basis points until it reached the current rate of 40 percent in three steps, starting on April 27, then May 3 and then May 4.

In addition, the central bank also widened the interest rate corridor to allow domestic assets to move more freely and was active in the secondary paper market.

Given the unusual situation and the use of exceptional tools, the central bank said it was appropriate to share its vision about the near future.

First, the BCRA confirmed that its monetary policy regime is based on interest rates with a floating exchange rate that absorbs external shocks, with interventions only in exceptional cases when the movements can be disruptive to the process of lower inflation.

Secondly, as the market stabilizes, the central bank will normalize its operations and return to a narrower corridor that allows the policy rate to be automatically transmitted to other interest rates.

Thirdly, with regard to the reference rate, the central bank considers that it will be necessary for the level of real interest rates to be significantly higher than before recent changes when inflation is above that forecast for 2018 and when there is a situation of greater instability in emerging markets.

The current bout of peso weakness and investor nervousness stems from Macri’s decision on Dec. 28, 2017 to push back the goal of lowering inflation to 5 percent by one year to 2020 and raise the inflation target to 15 percent from a previous 8-12 percent.

On Jan. 9 and Jan. 23 the central bank then lowered its key rate in two steps by a total of 150 basis points, arguing the rise in inflation is transitory and it will continue its downward trend once the one-off impact of a higher in regulated prices dissipates.

But inflation is still rising and rose to 25.6 percent in March from 25.4 percent in February.

Although the depreciation of the peso is likely to impact local prices, the central bank said many of its trading partners have also seen their currencies depreciate, moderating some of that impact.
The latest survey showed a rise in 2018 inflation expectations to 22 percent from 20.3 percent for headline inflation and to 19.8 percent from 18.1 percent for core inflation, BCRA said.
This article originally appeared on CentralBankNews.info and is reproduced here with permission from the author.

Chile Holds Rate, Sees Steady Rate Till Inflation Nears 3 Percent

Chile‘s central bank left its monetary policy rate at 2.50 percent and said its board “foresees that it will keep the monetary stimulus at its current level until macroeconomic conditions tend to consolidate the convergence of inflation towards 3%.”

The Central Bank of Chile, which has maintained its rate since May 2017, added it expects inflation to remain low during the better part of this year and then rise toward the 3.0 percent target as the capacity gap gradually closes.

But the persistence of low inflation, especially low core inflation, means the central bank will continue to monitor “with special care” the risk that inflation will not reach the inflation target.

Chile’s headline inflation rate declined for the fourth consecutive month to 1.8 percent in March from 2.0 percent in February, with the central bank saying inflation was still driven by the appreciation of the peso, the current capacity gaps and indexation to lower inflation rates.

Inflation expectations showed no significant change from the March monetary policy report, the central bank said, with analysts’ expectations for inflation one year ahead between 2.5 and 2.7 percent and between 2.8 and 3.0 percent two years ahead.

Chile’s peso has appreciated since January 2016 though it eased in the last half of April in line with the trends seen in international markets.

Today the peso was trading at 618.5 to the U.S. dollar, down 0.5 percent this year but up 8.2 percent than at the start of 2017.

The latest data on economic activity and demand are in line with the baseline scenario in the March report, with growth in the first quarter significantly affected by the rise in mining. Activity in other sectors maintained the better performance seen in earlier months, with the central bank pointing to a greater contribution of several investment-related sectors.

But private salaried employment has yet to recover and wages have decelerated, which the bank said could “take a toll on wage mass growth and possibly on consumption.”

The economic expectations survey from April showed no major changes in expected growth for this year and 2019, with growth in each year seen somewhat above 3.5 percent.

In March the central bank raised its forecast for growth this year to 3.0-4.0 percent from 2.5-3.5 percent.

Last year Chile’s economy grew 1.5 percent, up from 1.3 percent in 2016.

This article originally appeared on CentralBankNews.info and is reproduced here with permission from the author.

Peru Holds Rate Steady, Sees Inflation in Range in Q2

Peru’s central bank left its policy rate steady at 2.75 percent, noting the fall in inflation in the last five months, declining inflation expectations and economic activity that is below potential.

The Central Reserve Bank of Peru (BCRP), which cut its rate in March and January this year, also reiterated its recent guidance that it is paying close attention to inflation and would consider making additional changes to the policy rate if it were necessary.

BCRP has been in an easing cycle since May 2017 and has lowered the key rate six times by a total of 150 basis points.

Peru’s inflation rate has been falling rapidly since March last year when food prices jumped in response to devastating floods that killed more than 100 people and wiped out crops and roads.

In March inflation fell to only 0.36 percent, sharply down from 3.97 percent 12 months ago, and well below the BCRP’s target range of 1-3 percent.

The central bank said inflation is projected to return to its target range in the second quarter and then gradually converge to 2.0 percent by the end of this year. But inflation expectations 12 months ahead have continued to decline to 2.18 percent.

The Peruvian sol has been relatively steady in the last year and was trading at 3.22 to the U.S. dollar today, up 0.9 percent this year.

This article originally appeared on CentralBankNews.info and is reproduced here with permission from the author.