On June 22, 2017, Mexico’s Central Bank (Banxico) made another hike in its policy rate, saying that it was consistent with the efficient convergence process of the 3% inflation objective. For Banxico, this is the fourth adjustment of the year, and the 19th since Banxico started a rising rates cycle in late 2015. With all the global economic uncertainty, are we seeing the same trends in other countries of the region? Let’s take a deeper look into what the central banks of Brazil, Chile, Colombia, and Peru have done in the past couple of years and how inflation is one of the main objectives for the changes in policy rates.
First, Exhibit 1 presents the historical policy rates since 2005 of these countries, and Exhibit 2 shows the actual policy rates of the central banks with their target inflations, actual inflations, and adjustments in the policy rates since 2016. We can see how Peru hasn’t made many adjustments since 2016, with a total of only two in February 2016 and May 2017, leaving the policy rate at 4%—where it was at the beginning of 2016. Meanwhile, Colombia and Mexico have changed their overnight rates 10 and 9 times, respectively. Colombia had a cycle of increases in 2016 but decreased rates in 2017, closing May 2017 50 bps above since the start of 2016 (the Central Bank of Colombia has a meeting on June 30, 2017). On the other hand, Mexico has increased rates by 400 bps after they were steady at 3%, a historical low, for more than 1.5 years. Also, note that the last adjustment for all central banks has been on the downhill with the exception of Mexico.
One of the key components influencing policy rate decisions is inflation. For Mexico, it is the main point Banxico has mentioned in their past announcements. Taking into account market movements and inflation, Exhibits 3 and 4 show the performance and annual returns of the S&P DJI’s inflation-linked bond indices for these countries.
Source: S&P Dow Jones Indices LLC. Data as of June 23, 2017. Past performance is no guarantee of future results. Table is provided for illustrative purposes. For more information, please see: S&P/BM&F Brazil Sovereign Inflation-Linked Series B Bond Index, S&P Chile Sovereign Inflation-Linked Bond Index, S&P Colombia Sovereign Inflation-Linked Bond Index, S&P/BMV Government Inflation-Linked UDIBONOS 1+ Year Bond Index, S&P Peru Sovereign Inflation-Linked Bond Index.
It is interesting how inflation-linked bonds have performed in Peru in 2017, since its inflation is at -0.42% year-over-year as of June 23, 2017. Also, as discussed in the paper “Liquid by Design-Building Inflation-Linked Bond Indices,” inflation in Brazil has been a concern, leading the inflation-linked bonds to outperform their peers for the past one, three, five, and seven years.