Itaú BBA - BCCh stays on hold and maintains a neutral bias

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BCCh stays on hold and maintains a neutral bias

July 13, 2017

As unanimously expected by market participants, the BCCh left the policy rate at 2.5% at its July meeting.

With information available until 6:30pm Brasilia time


  • As unanimously expected by market participants, the BCCh left the policy rate at 2.5% at its July meeting. The press release announcing the decision retains the same neutral bias adopted in the previous meeting. The move is in line with a wait-and-see approach, avoiding an automatic reaction to a single data point, rather opting to evaluate how growth and inflation unfolds ahead. The central bank implemented an easing cycle totaling 100bps in the first five months of this year (see Macro Backdrop).
  • Solid Chinese trade data boosted LatAm FX (+0.25%). The CLP appreciated 0.38% to 660.67/USD and the COP posted gains of 0.16% to 3,044.94/USD. The MXN outperformed, trading 0.52% stronger to 17.68/USD. At last, the BRL stood broadly flat at 3.2116/USD (-0.10%). 
  • Most LatAm curves steepened in the session. In Brazil, the Jan19x25 spread widened 4bps. In Colombia and Chile, the 1s10s went up 2bps and 4bps, respectively. On the other hand, the Colombian curve bucked the trend (1s10s: -4bps). 

Macro Backdrop

  • Service sector real revenue rose 0.1% in May, in line with expectations. According to the IBGE’s monthly services survey (PMS), services sector real revenue rose 0.1% mom/sa in May, following a 1.0% gain in April. The year-over-year growth came at -1.9%, in line with the median of expectations (-1.8%). The headline came above the number used in our GDP tracking (-2.3% yoy), but the breakdown by component (that we actually use in the models) ended up being neutral to our forecasts. The positive headline is consistent with industrial production and other monthly indicators advancing in May as the economic recovery becomes more disseminated. Five out of ten activities showed positive growth, so the diffusion of activities came in line with the headline. 
  • Eventual adjustments in the labor bill would not undermine its main points. Due to an agreement between President Temer and lawmakers, the reform approved by Congress on Wednesday could be modified by him via a provisional measure. Nevertheless, eventual changes would likely affect only non-core aspects of the bill. All in all, the labor legislation overhaul, which aims at making the job market more flexible, would be positive for the Brazilian business environment. See below its main points.
  • Macro vision: what is the impact of heightened uncertainty on future monetary policy steps? In this note, we use the distinction between the short-term and long-term neutral interest-rate concepts to analyze the recent communication from the BCB and to evaluate the impact of heightened uncertainty on monetary policy. Full Report
  • The Lower House Constitutional Committee (CCJ) voted against putting President Temer on trial. 
  • The BCB placed the full offering of 8,300 FX swaps. After closing, the central bank announced another roll over auction of up to 8,300 contracts (USD 415 million) on July 14. 
  • The central bank downplayed the significance of the downside surprise to inflation in June. In the background information note for this meeting, the central bank indicated that in spite of the June inflation surprise (-0.4% MoM vs. the 0% Bloomberg market consensus), core inflation is unfolding in line with the 2Q IPoM. Meanwhile, headline inflation is somewhat 50bps below the central bank’s forecast, but it was mainly attributed to the evolvement of fruit and vegetable prices and some specific goods (e.g, tourism packages). Additionally, the press release noted that inflation expectations for the short run have decreased, but they remain anchored for the relevant 2-year horizon (analysts: 3%; traders: 2.8%). Activity remains in line with expectations, with consumption stable given by the evolvement of the labor market. Meanwhile, external financial conditions are still favorable.
  • While we do not expect further rate moves this year, there are risks of further interest rate cuts. In particular, we believe that if activity fails to show signs of a recovery in the second half of the year in line with the baseline IPoM scenario (GDP growth of 1.0%-1.75% this year) or if inflation remains feeble, the board will likely re-evaluate its current stance (stable rates until at least 2H18).
  • Ratings agency S&P lowered Chile’s long-term foreign currency rating to ‘A+´ long-term foreign currency rating, outlook stable. In January this year, S&P lowered the outlook to negative on the ‘AA-‘ rating and gave a 33% chance of a rating downgrade before the end of 2018. The disappointing growth performance in 1Q17 likely fast-tracked the downgrade. A one-notch rating downgrade has for some time been priced in by the market (as shown in Chile’s 5-year CDS: 65, which is close to ‘A’ rated countries), and leaves Chile six notches above investment grade. The agency highlights that the prolonged period of subdued economic growth has hurt Chile’s fiscal revenue and led to increases in the government burden and eroded the country’s macroeconomic profile. S&P note these factors have moderately increased Chile’s risk to external vulnerabilities. The agency acknowledges that although the government's debt burden is still low compared with most sovereigns, the persistent increase of the debt burden has been the source of concern. S&P adds that the stable outlook reflects the view that gradual fiscal consolidation and a slow but sustained economic recovery will help stabilize Chile's external profile. Regarding the outlook, the agency notes that a negative outlook in the next 2 years could be adopted if activity disappoints further, which could lead to larger fiscal deficit and increased debt burden. Additionally, the same action could unfold if there is a loosening of the Chile’s commitment to prudent fiscal and monetary policies. Conversely, the outlook  could be upgraded to positive provided a scenario of sustained growth recovery, along with prudent fiscal and monetary policies, materializes. 
  • We reiterate that the level of public debt is not the main concern for rating agencies but rather the rapid widening that has unfolded in the last decade. Chile’s credit rating includes a negative outlook from Fitch (A+) and a stable outlook from Moody’s (Aa3), but the latter recently raised concern on rising debt levels.
Market Developments 
  • GLOBAL MARKETS: Equity markets were on the green after solid Chinese trade data. Exports and imports came in better than expected in June, remaining in an upward trend. Exports came at 11.3% yoy (prior: 8.3%, consensus: 8.9%), while imports came at 17.2% yoy (prior: 14.5%, consensus: 14.5%). China’s exports and imports are in a positive trend since 2H16, in line with the synchronized improvement in the global economy. However, as the Chinese economy continues to decelerate ahead, its imports will likely slow down. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices increased (WTI: +1.32% to USD 46.09/bbl) after Chinese trade data came in above expectations. Crude oil net imports rose 17.9% in June, above the figure registered in 2016 and 2015. Moreover, grains dragged down commodities as soybeans fell 0.89% in the session. In FX, commodity-linked (+0.22%) pairs posted gains. The MXN outperformed, trading 0.52% stronger to 17.68/USD. The CLP appreciated 0.38% to 660.67/USD and the COP posted gains of 0.16% to 3,044.94/USD. At last, the BRL stood broadly flat at 3.2116/USD (-0.10%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads traded range bound in LatAm. For the 5-year tenor, CDS in Chile and in Mexico stood flat at 65bps and 111bps. In Brazil and Colombia, however, country risk fell 1bp to 228bps and 137bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened in the session. In DI futures, while short rates inched down (Jan-18:-1bp to 8.72%), long ones widened (Jan-21: +6bps to 9.82%). For the remainder of the year, the curve implies roughly 200bps in rate cuts. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields widened on the back of the rise in US treasury rates. In TIIE swaps, the 1-year increased 3bps to 7.29% and the 5-year went up 6bps to 6.81%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, ahead of the monetary policy rate decision, short rates stood flat while long ones traded higher. In Camara swaps, the 1-year stood put at 2.35% and the 5-year widened 4bps to 3.36%. Chile Rates Tracker In Colombia, most yields narrowed in the session. In IBR swaps, while the short end traded range bound (1-year: +1bp to 5.04%), long rates narrowed (5-year: -7bps to 5.43%). Colombia Rates Tracker

Friday Events

  • In Brazil, the BCB will release its monthly activity index (IBC-Br) for May. 
  • In Colombia, activity indicators for the month of May will be published. We expect industrial production to increase 2.0% year over year (-6.8% in April). Meanwhile, retail sales likely saw growth of 1.4% in twelve months (-2.0% previously), boosted by car sales. Heavy rains and a port strike could have hampered activity in the month. Also, the central bank of Colombia will release the minutes of the monetary policy meeting held in June. At the meeting, another split board decided to cut the policy rate by 50bps to 5.75%, more aggressive than the 25bp cut in the previous month. It will be of interest to see if the minutes reiterate recent comments from the central bank’s general manager, as well as the finance minister, who have both indicated that room for further easing is narrowing. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

Macro Reports

Labor reform main points:


  • Allow negotiations between employers and employees to prevail over what is written in law on aspects such as: working hours (limited to 12h/day and 220h/month), participation in bonus and profits, shifts, work breaks, career plans, entry into employment insurance, among others.
  • However, it does not allow negotiation on the following aspects: workers fund (FGTS), 13th salary, unemployment insurance and family-wage (social security benefits), overtime pay (50%), 120-day maternity leave, early notice of leave proportional to work time, rules on worker health and safety.
Labor Justice
  • The bill sets more rigorous lawsuit procedures, limiting the power of courts to interpret the law, and taxes an employee who initiates a lawsuit in bad faith. Employee will be obliged to attend hearings in court and to bear the costs of the proceedings, should he/she lose the case. Today, the employee is allowed to be absent in up to three court hearings. Costs of legal procedure incurred by losing party in a lawsuit (court costs, attorney fees, etc.) to be limited by four times the maximum Social Security benefit (currently at BRL 22.125,24).
Working time
  • Activities such as resting, studying, eating, social activity among colleagues, personal hygiene, uniform change and  hours commuting to work – hours will begin counting once employees arrive at work – will no longer be accounted as working hours.
Labor union dues
  • Currently mandatory, would become voluntary or significantly reduced.
Intermittent work
  • Allows workers to earn by working period or working day, and proportional vacation pay, FGTS, social security and 13th salary.
  • Exception: Aviation, among other working classes.
Termination of contract
  • Currently not regulated, would allow companies to lay off workers without needing to terminate the contract at the labor unions.
Work at home
  • Allows home office, in previous agreement with employer, including use of equipment and energy / internet costs
Representation by union
  • Employers’ representation will no longer need to be exclusively unions. Unions will continue existing and negotiating. 
12h work shift x 36h rest
  • Allows this arrangement. 
  • Responsibility over employer would be from acquiring firm.
Unhealthy work environment
  • Pregnant women would be allowed to work in such environments provided the company presents medical certificate guaranteeing health of employee.
  • Part-time work is up to 30 hours per week, with no possibility of additional hours per week, or 26 hours per week – with the possibility of 6 extra weekly hours. Overtime work will get an additional 50% pay over the normal hourly wage. Currently, part-time work has a maximum duration of 25h/week and overtime is prohibited.
  • Prohibits a company from rehiring, as outsourced, an employee fired by that same company.
Travel time
  • The time spent by the employee in transportation between work and home, by any means of transport, will not be accounted for as working hours. Today, these hours count in cases where transportation is provided by the employer to places of difficult access or not reached by public transportation. 
Worker who earns more
  • Contractual relations signed between an employer and an employee holding a higher education diploma and receiving a monthly wage equal to or greater than twice the maximum Social Security benefit (currently at BRL 22,125.21) will prevail over what is written in the current regulation.
  • Just Cause termination allowed in cases where worker intentionally acts towards losing his own abilities required to fill the job description.

André Matcin

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