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.