Itaú BBA - Rates edge even lower in LatAm

Global Scenario Review

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Rates edge even lower in LatAm

October 14, 2019

Interest rates are expected to become even lower in Latin America. In Brazil, we now expect the Selic rate to fall to 4% in the end of 2020

Please open the attached pdf to read the full report and forecasts.

Global Economy
Low growth, low interest rates, USD strength might be ending
The trade truce is important, but will not be enough to lift global growth. Therefore, policymakers will continue to ease. Cooling economic activity in the U.S. will likely limit USD strengthening. 

Deepening the monetary adjustment
We now expect the BCB to extend the easing cycle even further, bringing the Selic rate to 4.5% at the end of 2019 and 4.0% in 2020. 

A return of ghosts from the past
A moderate debt haircut is unlikely if not accompanied by a meaningful fiscal consolidation.  

Frontloading rate cuts
We now expect the policy rate to end 2019 at 7.00% and 2020 at 6.00% (previously, 7.25% and 6.25%, respectively) given the economic weakness and its likely impact on core inflation. 

Turning the corner?
Activity surprised positively in August, creating an upside bias to our 2.2% growth forecast for the year. However, it is still uncertain whether this is a one-off boost or a change in trend.

Political risk increases
The Constitutional Court will likely have to sort out a dispute between President Vizcarra, who called new legislative elections, and lawmakers, which responded by suspending his powers. 

In wait-and-see mode
The central bank is in wait-and-see mode and we expect rates to remain stable throughout our forecast horizon. However, rate cuts remain more likely than hikes.


Rates edge even lower in LatAm

Responding to risks of a sharper economic downturn, U.S. and China reached a new trade truce that will likely bring some short-term relief to the global economy. Nonetheless, uncertainty tends to remain high – meaning that the recent developments may help preventing a steeper deceleration, but will not be enough to lift the global economy. 

Growth in the U.S. is set to start converging towards a slowdown, like what is seen elsewhere (even if not with the same intensity): investment and employment are set to perform modestly due to policy uncertainty and a slower exports. Therefore, the dollar appreciation trend might be getting close to an end.

Despite the turbulent environment, some LatAm economies are displaying incipient signs of recovery: activity remains resilient in Colombia and is improving in Brazil and Chile (growth also picked up modestly in Peru, but the recent political crisis will likely prevent further gains). On the opposite end, Mexico’s economy continues to deteriorate with falling investment, while Argentina has set course for contracting again next year. Notwithstanding the different growth and policy mixes, most countries in the region are bound to continue monetary easing. Regional currencies have recently weakened, but inflation is comfortably low in Chile, Peru and Brazil – and tends to retreat in Mexico soon enough. Therefore, we now expect to see even lower rates in these countries.

In Brazil, we now forecast that the Selic rate will fall towards 4%, with two more 50-bp cuts this year and other two 25-bp steps next year. The main factors that warrant an even looser monetary policy have already been in place for while – low inflation, anchored expectations, wide economic slack and fiscal consolidation – but the way for additional cuts has now been more clearly unblocked by the trade truce, which will likely result in lower volatility of risky assets, such as the BRL. As the main result of more stimulus, we expect GDP to grow by 2.2% in 2020, up from the previous 1.7% forecast (we also see growth a tad higher in 2019, now at 1%, due to better readings at the margin). Also because of lower rates, we increased our yearend forecasts for the exchange rate, to 3.90 BRL/USD this year and 4.25 in the next (from previous forecasts of 3.80 and 4.00, respectively).


Global Economy
Low growth, low interest rates, USD strength might be ending

• Trade truce important, but not enough to lift global growth.

• U.S. GDP to slow to 1.5% in 2020, Fed to cut another 25bps this year.

• Europe: fiscal stimulus not enough to spur growth.

• China: fragile stabilization.

• USD strength might be ending.

• LatAm: deepening the easing cycle.


Please open the attached pdf to read the full report and forecasts.

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