In a “preventative” measure to tackle inflation and inflation expectations, Peru’s central bank has raised rates 25 basis points for the third consecutive month. The reference interest rate now stands at 3.75 per cent.
The move was widely expected given rising – but still moderate – inflation pressures. Annual inflation to February was 2.23 per cent. Month-on-month the increase was 0.38, just below January’s monthly increase of 0.39, which was the highest in two years. The Bank’s target is to keep inflation below 3 per cent. The central bank has indicated that monetary policy remains accommodative at 3.75 per cent, and that 4.5 per cent would be more “neutral”, suggesting further rises lie ahead. There might be a pause at the next meeting, however, given moderate and tempering inflation.
Brazil has raised rates half a point to 11.75 per cent, the second rise in three months. Copom, the monetary policy committee, voted unanimously for the raise to rein in inflation. A single sentence accompanied the decision, offering no clues as to the thoughts of policymakers on the future direction.
Prices rose 6.08 per cent in the year to February, above the central bank’s 4.5 per cent target, though within tolerance bands of +/- 2 percentage points. Given the strength of recent inflation, some analysts had expected a three quarter point rise in the selic rate. Significantly, though, food price pressures have receded in Sao Paolo, data showed today.
Colombia raised rates 25bp late on Friday, the first rise since the financial crisis. The move, which took markets by surprise, takes the Bank’s key intervention rate to 3.25 per cent, compared with 10 per cent before the cuts began. Colombia also said it would continue its $20m-a-day dollar purchasing programme, through which it is trying to dampen appreciation of the Colombian peso.
Peru, meanwhile, yesterday raised its reserve requirement ratio for the second time in two months. The quarter-point rise applies to sol- and dollar- denominated bank reserves and is intended “to keep inflation expectations anchored within the 1 percent to 3 percent target range,” the bank said in a statement, according to Bloomberg. Peru also raised rates in January and February, taking the key rate from 3 to 3.5 per cent since the start of the year.
The Bank of Chile “continue[s] to reduce monetary stimulus,” raising rates yesterday to 3.5 from 3.25 per cent. Inflation fell last month and is below the 3 per cent target, at 2.7 per cent in the year to January. The trend, however, is strongly upward and recent deflation will be fresh in the minds of policymakers. Last month, Chile held.
Rising inflation expectations might push Colombia’s central bank to raise rates from their record low. Minutes released today said that short-term expectations were in the upper half of their target range, while long-term expectations (5 to 10 years) “surpassed the ceiling of that range”. The bullish sentiment was tempered, however, by uncertainty:
The points [the members of the Board] stressed as being fundamental for an eventual hike in the intervention interest rate are, among others, growing upward inflation expectations above the target range, the important momentum in internal demand, high asset prices, and the accelerated build-up in lending.On the other hand, low core inflation levels and the recent relative stability in prices for non-tradable goods, excluding food and regulated items, the possible temporary nature of the increase in food prices, the unstable situation with respect to the sovereign debt of several European countries, and the lack of certainty surrounding the forecasts for inflation and growth in the months ahead were underscored as factors in favor of keeping the rate at its present level.
Brazil has raised rates by 50bp to 11.25 per cent to try to bring inflation back to target. The central bank also introduced new reserve requirements for dollar short sellers recently, in an effort to counter inflationary pressure on the real. Prior to the rise, the selic rate had been on hold for about six months at 10.75 per cent (see chart).
Consumer price inflation ran at 5.91 per cent in the year to December, in the upper end of the target range of 4.5 per cent +/- 2 percentage points. This was the highest since at least December 2008, when the Bank’s historical series begins.
Chile has held rates at 3.25 per cent, following its pledge to buy $12bn in the forex market to weaken the peso. Pundits had been split roughly equally between a rate hold and a small rate rise. The central bank has typically been raising rates regularly but by small increments of late (see chart, right).
Inflation in Chile is running at 3 per cent, exactly on target (which allows for one per cent either side of this) – but it is rising quickly. Chile recently pointed to the effect of the Fed’s $600bn stimulus programme on its currency – i.e. causing appreciation – and in doing so, joined a chorus of opposition from emerging markets trying to cope with an influx of “hot money”.
Banks betting that the real will go up have 90 days to comply with a new reserve requirement from the central bank aimed at weakening the real. The measure is the latest in a series of tools emerging markets are adopting to slow currency appreciation.
Financial institutions with short dollar positions must deposit cash – which will not earn interest – at the central bank. According to the release, the amount is worked out by formula (via Google Translate):
financial institutions should collect the Central Bank in the form of compulsory deposits, 60% of the value of the sold foreign exchange position that exceeds the lesser of: $ 3 billion, or heritage reference (PR). This compulsory deposit will be collected in kind and will not be paid. Institutions will have 90 days to fit the new rule.
Chile’s Finance Minister says the Fed’s second round of quantitative easing put upward pressure on the peso, as he welcomed central bank plans to weaken the currency.
The peso has fallen very sharply on news that the Banco Central de Chile plans to buy $12bn in the foreign exchange markets. On the shopping list is $50m per day from January 5 to Feburary 9.
Thereafter, the central bank aims to offset the liquidity effects and “soften the impact on the prices of debt market instruments” by selling $10bn-worth of peso-denominated bonds plus $2bn-worth of short-term maturities. Read more
Interest rates might need an “adjustment” to stem the rise in consumer prices, Brazil’s central bank has said. The country’s key selic rate has increased several times since the cuts that followed the financial crisis, but levelled off at 10.75 per cent in June.
The Bank’s inflation report, released yesterday, suggested such a rise was imminent:
Under the inflation targeting regime, deviations in projected inflation from the target of such magnitude suggest the need for implementation, in the short-run, of an adjustment in the basic interest rate, in order to control the growth pace mismatch between the domestic demand and the productive capacity of the Brazilian economy, as well as to reinforce the anchorage of inflation expectations.
Some analysts have interpreted this as a January rate rise.
Banco Central do Brasil explained that the balance of risks associated with inflation had “evolved unfavorably since the release of last Report”. Read more
Lower-than-expected growth in Brazil and New Zealand have prompted their central banks to maintain rates; in South Korea, “greatly decreased” inflation motivated the hold decision, in spite of a “continued upward trend” in growth.
Brazil’s monetary policy committee, Copom, kept the Selic rate at 10.75 per cent, hinting that a rate cut might have been on the cards were it not for recent macroprudential policies, whose effects on monetary conditions were yet to be seen. Read more
Chile has again raised rates, though it has suggested the pace of rate hikes may slow due to lower-than-expected inflation:
Inflation has proceeded slightly below expectations… With respect to the dollar, the peso remains fairly unchanged since the last meeting. Read more
Using inflation-linked bonds to forecast inflation? Beware – new research suggests they are only decent predictors in the short-term. Over long horizons, the relationship is actually negative:
We showed that the break-even inflation is informative about future inflation over horizons of 3, 6, 24 and 30 months. For the 3- and 6-month horizons, besides being informative, break-even inflation is an unbiased estimator as well. However, over the horizons of 24 and 30 months, the relationship between the break-even and future inflations is negative. On the other hand, for the horizons of 12 and 18 months, breakeven inflation has almost no power to explain future inflation. Read more
No surprise from the monetary policy committee at Brazil’s central bank: its target overnight interest rate, known as the Selic, remains unchanged at 10.75 per cent a year, the committee announced on Wednesday evening after its latest meeting (held every six or seven weeks).
The Copom, as the committee is known, was unanimous in its decision, as were analysts in their expectation that this was what it would do. The bank was hardly likely to raise interest rates so soon after the finance ministry unleashed its latest weapons in the currency war, even if inflation expectations have been creeping up.
According to the central bank’s latest survey of market economists, published on Monday, consumer price inflation is expected to reach 5.2 per cent this year and 4.99 per cent in 2011, above the government’s target of 4.5 per cent. Expectations have been on the rise for the past five weeks. Meanwhile, economist at the bank’s “top 5″ institutions (those who most often get these things right) are predicting CPI of 5.31 per cent this year and 5.71 per cent in 2011. So it looks as though a big miss is on the cards, this year and next. Read more
Chile’s central bank is still raising rates, but more slowly. On Thursday, the Bank increased its key policy rate 25bp to 2.75 per cent, as expected. This marks a slowdown for the Bank, which has increased rates by 50bp every month since June.
Banco de Chile cited an appreciating peso and a slowdown in developed economies as key risk factors: “Slower than expected recovery in developed countries is an important risk factor facing emerging economies.” Inflation has also tempered more quickly than expected with annual inflation currently standing at 1.9 per cent; short- to medium-term inflation expectations have also fallen and are now bang on target at 3 per cent.
‘Unsustainable growth in credit’ has prompted the Peruvian central bank to raise its reserve requirements. Banks will need to hold funds equivalent to 75 per cent of borrowings abroad maturing in less than two years, up from 65 per cent, reports Bloomberg.
The economy shows some signs of overheating, with rising inflation and a strengthening currency that consistent recent forex interventions have slowed but not reversed (see chart; source). The Reserve bank has increased its reference rate steadily during 2010, the most recent rise taking the rate to 3 per cent.