The central bank of Peru (BCRP) increased rates by 25 bps as expected by the market and RGE, taking the policy rate to 3.75% on March 10. Similar to the previous month, the press release highlights that the hike is preventive in a scenario of high international food and energy prices, and seeks to limit the impact of supply-side shocks on private expectations, in the context of strong domestic demand.
March 8 marks 100 years since the first International Women’s Day. Over the past few decades, Latin America has made significant advances on gender equality. As proof of that trend, the rate of female participation in the labor force has increased to nearly 57% in 2009 from 35% in 1980. In addition, participation gains can be traced across all sectors: Less than 30% of the increase of women in the labor force is directly linked to the expansion of sectors traditionally dominated by women, such as education and health. Moreover, women’s earnings have increased by more than 10%, and their share of overall household income ranges from 30% in Costa Rica to over 60% in Jamaica. Compared with other regions, LatAm also has a higher rate of female entrepreneurship and a smaller gap between male and female entrepreneurs.
Mexico’s central bank (Banxico) kept its benchmark rate unchanged at 4.5% at its March 4 meeting, in line with market consensus, including RGE’s expectations. In its communiqué, Banxico said that economic activity in advanced economies is now being driven by external demand and domestic consumption. With regards to global prices, the bank mentioned that numerous factors including high levels of liquidity, adverse weather conditions and the geopolitical conflicts in parts of the MENA region were driving costs upward and represent risks to the global economic recovery. In many emerging economies in particular, the rise in raw materials prices has increased the risk of inflation.
Mexican Inflation (y/y) and Monetary Policy Rate Source: Banxico and RGE
The PMI stayed above 50 in February, advancing 2.9% m/m seasonally adjusted (SA) to 54.6, after growing 1.3% m/m SA in January and 5% m/m SA in December. The index is 43% above the low of 38.1 reached in January 2009, but 5.5% below the high of 57.8 in January 2010. Solid domestic demand rather than external demand generated strong growth in new orders, pushing companies to increase output and hire workers. Inventories decreased rapidly, while average input costs increased at a marked pace.
Colombia’s central bank (Banrep) increased the benchmark rate by 25 basis points to 3.25% at its February 25 meeting, the first hike after maintaining the rate at 3% for nine consecutive months. The decision surprised the markets and RGE as expectations were tilted toward an unaltered monetary policy rate. In its communiqué, Banrep said that the conditions keeping the rate at a low level had changed as domestic demand and credit dynamics had improved, economic growth is approaching its long-term trend, inflation projections are close to the middle of the target range and inflation expectations have deteriorated. Still, Banrep maintains that the new rate level is supportive of economic and employment growth and helps to keep inflation within the target range.
Expectations for Brazil’s benchmark SELIC monetary policy rate for year-end 2011 remain at 12.5%, implying 125 bps of tightening for the rest of 2011. For 2012, analysts kept their forecast at 11.25%, suggesting 125 bps of cuts. Meanwhile, as of February 22, the markets’ DI futures curve moved back up to a total of 175 bps of hikes to 12.9% for the rest of 2011 from 150 bps a few days ago. The markets expect the COPOM to raise rates by 50 bps in March, continue with another 75 bps increase in Q2 (78.4 bps) and end the year with a 50 bps hike in H2 (41.4 bps). Markets anticipate the SELIC rate staying unchanged in 2012.
As annual salary negotiations begin in Argentina, the country’s public and private sector unions in Buenos Aires and other major cities are demanding salary increases of more than 30%. These are above the controversial official inflation estimates (11% y/y in 2010) published by the National Statistics Bureau INDEC, as many unions question the data and expect greater inflationary pressure in 2011 given the upcoming presidential election in October. Quoted in the local press, several leading figures of the construction (UOCRA) and health unions (ATSA) said that the demands merely reflected the evolution of day-to-day prices. Most unions are demanding quadrennial salary adjustments to prevent deterioration in their real incomes, with inflation remaining on the upward trend.
Chile’s central bank (BCCh) resumed the tightening cycle with a 25 basis point (bp) rate hike on February 17, taking the monetary policy rate to 3.5%, as expected by RGE and consensus. According to the communiqué, the growth prospects for developed economies have improved while emerging economies continue to grow robustly. However, concerns about the fiscal stance in some European economies remain, and setbacks on the recovery path of developed nations continue to be a risk factor for the developing world. International prices of raw materials, particularly food, continue to increase. Actual inflation and inflation expectations have increased worldwide and a variety of countries have removed monetary stimulus.
Banrep, the Colombian central bank, said that for Q4 2010 it expects similar growth to the 3.6% registered during Q3, driven mainly by external demand. Adverse weather conditions during late 2010 affected the agriculture sector, as well as construction, gross fixed capital formation and mining exports, which were reduced due to problems with extraction and transport. Borrowing, corporate debt and investment in machinery and equipment expanded at high rates as nominal and real interest rates are at historical lows. Household consumption continued to develop positively, reflected by improved consumer confidence and benefiting from a rise in formal employment for skilled workers. Foreign trade dynamics showed exports growing 19.5% annually by November, driven by mining, energy and coffee exports, while imports rose 34.5% during the same period.
Peru’s economy likely grew by 8.8% y/y in December, compared with a 9.6% y/y 3MMA, bringing average growth to 8.8% in 2010 from 0.9% y/y in 2009. Strong domestic demand (11.1% y/y) and a beneficial external backdrop—as reflected by higher commodity prices—underpins the strong economic performance, although a high base should start to kick in. At the sector level, the economic activity should benefit from solid expansion in construction (16% y/y), manufacturing (9% y/y), retail sales (9.6% y/y), and services (9.1% y/y); however, all of these have decelerated from the buoyant growth in previous months. Mining should print its first positive reading since August, as indicated in the national statistics institute’s (INEI) advance report on economic activity.