Itaú BBA - Copom signals flat interest rates, activity continues to slowdown

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Copom signals flat interest rates, activity continues to slowdown

August 1, 2014

The Copom signaled flat interest rates but announced stimulus to credit.

The Brazilian economy in July 2014

The Copom signaled flat interest rates but announced stimulus to credit. The primary surplus continued to decline.  Industrial production retreated again and retail sales slowed down. Job creation was still weak in June, but the unemployment rate remained low. The IPCA-15 for July came in below expectations but is above 6.5% over the past 12 months. The World Cup led to increased revenues from international travel. Pre-electoral polls continue to be announced, and political parties' free TV and radio programs are due to start on August 19.

The Copom signals flat interest rates and announces stimulus to credit.

The Monetary Policy Committee of the Brazilian Central Bank (Copom) maintained the monetary policy rate (Selic) unchanged, at 11.00%, in line with expectations. In the minutes of the meeting, the Copom stated that, if monetary conditions are maintained, inflation tends to converge toward the target "in the final quarters of the forecast horizon" (i.e., in 2016). The Copom was even more explicit, indicating that its strategy does not consider a reduction in the monetary policy instrument. Thus, the minutes are consistent with our scenario of flat interest rates until the end of 2015. The day following the release of the minutes, the central bank announced changes in the rules for reserve requirements and capital requirements, providing stimulus to the credit market.

Primary surplus continues to decline.

The consolidated public sector recorded a primary deficit of BRL 2.1 billion in June. Over 12 months, the conventional primary surplus fell from 1.5% to 1.4% of GDP, while our estimate of recurring primary surplus (which excludes atypical revenues and expenses) declined from 0.6% to 0.4% of GDP, the lowest level in our series (started in 2002). In general, the numbers point to reduced chances of achieving this year’s fiscal target of 1.9% of GDP.

Industrial production retreated again...

Industrial production fell by 1,4% in June, its fourth consecutive monthly decline. The industry retraction partly reflects fewer working days due to the World Cup games, and partly the less-favorable fundamentals for production, such as sluggish global growth, interest rate hikes and declining business confidence.

...and retail sales continue to slowdown.

Core retail sales increased by 0.5% in May, after two consecutive declines. Broad retail sales (including vehicles and construction materials) dropped by 0.3% in the month. With the results, the quarter ended in May posted a drop in sales over the previous quarter, in both core and broad retail. For June, data released so far suggest a decline in sales.

Job creation was still weak in June...

According to data from the Labor Ministry (CAGED), 25 thousand jobs were created in June. The number was below our forecast (40 thousand) and below market expectations (with a median of 53 thousand). Adjusted for seasonality, the result means negative creation of 18 thousand jobs (reduction of posts). The three-month moving average fell for the fourth consecutive time, showing a reduction of 17.5 thousand jobs, the lowest level since March 2009.

... but the unemployment rate remained low.

Like the previous month, due to the strike, the IBGE released employment information for only four of the six metropolitan areas in June, without the national aggregate. According to our analysis extrapolating the information disclosed for the aggregate of regions, the unemployment rate continued to retreat, reaching about 4.7% (in seasonally adjusted terms). This was due to a greater increase in the employed population vis-à-vis the growth of the economically active population. Thus, unemployment remains at historically low levels.

IPCA-15 for July came in lower than expected but above 6.5% over the past 12 months

The IPCA-15 rose 0.17% in July, slightly below our forecast and the median of market expectations (both at 0.20%). The index had posted 0.47% growth in the previous month and 0.07% in July last year. With the result, the 12-month rate rose to 6.51%, up from 6.41% until June. The main deviations from our forecast came from the transportation group – due to greater-than-expected drops in air fares and fuel prices – in addition to food and personal expenses, with slightly higher-than-expected rates. In personal expenses, the highlight is the sharp increase in hotel rates in the World Cup host cities.

World Cup Effect boosts revenues from international travel 

The current account deficit declined to USD 3.3 billion in June, below our expectations and market consensus. The monthly result was helped by a significant trade surplus, as well as by reductions in deficits of the service and income accounts. The reduction in the services deficit is due to the temporary effect of the World Cup. Foreign direct investment totaled USD 3.9 billion, slightly above our expectations. Still, over twelve months, the figure fell from USD 35.4 billion to USD 32.2 billion.

Pre-electoral polls continue to be announced

The polls showed no major change in voting intentions for the first round of the presidential race. President Dilma Rousseff led the Datafolha poll, conducted between July 15 and 16, with 36%, while Aécio Neves followed with 20% and Eduardo Campos reached 8%. In the run-off, the polling shows Dilma leading by 4 percentage points ahead of Aécio and 7 points ahead of Campos. In the Ibope poll, conducted on July 18 and 22, Dilma reached 38%, followed by Aécio Neves with 22% and Eduardo Campos with 8%. For the run-off, the difference between Dilma, leading, and Aécio, in second, stands at 8 percentage points.

The Ibovespa rose and the Brazilian real depreciated

The exchange rate ended the month of July at 2.267 reais per dollar, a depreciation of 2.9%. The Ibovespa advanced 5% in reais and 2% in dollars. The country risk measured by the 5-year CDS rose 12 bps, to 156 bps.

Upcoming events 

Political parties' free TV and radio programs for the October elections are due to start on August 19. The first presidential debate will take place on August 21. The 2Q14 GDP will be released on August 29. We expect a negative quarterly growth rate, at -0.3%, seasonally adjusted.



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