Itaú BBA - We expect Banrep to deliver a 50-bp cut this week

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We expect Banrep to deliver a 50-bp cut this week

March 20, 2017

We see a cut in Friday as a given amid falling inflation and expectations as well as a board more mindful on the activity slowdown.

With information available until 6:30pm Brasilia time


  • We changed our call for Friday’s monetary policy meeting in Colombia. We now expect the central bank to cut the policy rate by 50-bp to 6.75%. This has to do with some factors including: February’s inflation surprised to the downside, when the full impact of the VAT hike was expected. Subsequently, the results from the central bank’s monthly survey showed inflation expectations declined in all the measured horizons. Lastly, even with a 50-bp cut this month, the ex-ante real rate will remain at a restrictive 3.0% (historical average: 1.7%).
  • In LatAm FX, all the currencies under our coverage appreciated. Since the market was closed, the COP stood flat at 2,913.05/USD. The CLP traded at 660.42/USD (+0.28%). The MXN appreciated 0.40% to 19.00/USD. The BRL outperformed its regional peers strengthening 0.62% to 3.0724/USD. 
  • Colombian and Mexican markets were closed for national holidays.

Macro Backdrop



  • Selic and inflation projections dwindle. According to BCB’s Focus survey, inflation expectations for 2017 retreated once again, remaining below the central bank’s target, to 4.15% (from: 4.19%), while 2018 and 2019 remained stable at 4.50%. Year-end Selic expectations for 2018 and 2019 dropped 25bps to 8.50% and 8.75%, respectively, while 2017 remained stable at 9.00%. Also, the market sees a slightly more appreciated BRL, at 3.29/USD by YE17 (from: 3.30/USD). GDP growth expectations improved for 2018 (to 2.50%, from 2.40%), while in 2017 and 2019 stood flat at 0.48% and 2.50%, respectively. See BCB Report
  • We discuss the preliminary impacts of the tainted-meat operation. By the time we wrote this piece, the news suggested the embargoes in China and Korea are temporary and, in some cases, applied only for the companies involved in the “Carne Fraca” operation. Brazil exports approximately USD 11 billion per year of bovine meat (2.3% of total exports), chicken (3.2%) and porcine (1.3%). The main importers are in Asia and Middle East. Therefore, the impact tends to be small unless authorities in these countries find that the problem in Brazil is broader or related to other protein exports as well.
  • We believe that the most likely scenario is the potential blocking of a few plants. In this scenario, there would be marginal impact on the trade balance and inflation. The weight of meat on the IPCA is 4.5% (beef: 2.6%; chicken: 0.9%; processed meat products: 0.8%; swine: 0.2%). We believe that the possible impact on inflation, if any, will be transient and not significant: maximum -0.10 pp. 
  • BCB placed the full offering of 10,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 10,000 contracts on March 21. 


  • At the close of 2016, economic activity grew at the slowest pace since the financial crisis. Activity in the final quarter of 2016 was dragged down by shrinking investment and declining exports. Meanwhile, private consumption remains the main contributor to activity growth, while the administration’s effort towards fiscal consolidation meant public consumption moderated significantly. Overall, activity in 2016 floundered with growth of only 1.6% (2015: 2.3%) - the lowest growth since 2009 (-1.6%). Upside data revisions to activity earlier in the year prevented even weaker growth in 2016. The 2013 rebased GDP expanded 0.5% y/y in 4Q16, broadly in line with our forecast and market expectations (both at 0.5%) based on the monthly GDP proxy. Economic growth was revised up by 0.3 percentage points in 1Q16 (to 2.5%), favored by weaker imports, while consumption helped lift growth by 0.2 p.p. in 3Q16 (to 1.8%). At the margin, the economy deteriorated. Sequentially, activity decreased 1.4% q/q, from the 3.5% q/q growth in 3Q16, due to lower fixed investment. 
  • With the weak end to 2016 and an even feebler start to 2017 expected, prospects of a recovery are diminished. The continuing labor strike at the largest copper mine will affect activity in both February and March. Hence, in spite of higher copper prices, falling inflation and declining interest rates, the weak carry-over effect, supply side shocks and uncertainty ahead of the presidential elections will likely stand in the way of a meaningful recovery. We now see GDP growth of 1.8% this year, down from our previous forecast of 2.0%. Full Report
  • Chile’s current account deficit remains low. In 4Q16, the current account recorded a USD 700 million deficit, smaller than the market’s USD 1.2 billion deficit forecast and our USD 1.1 billion call. Hence, the deficit fell to USD 3.6 billion in 2016 (-1.4% of GDP), after a USD 4.6 billion deficit in the year ended in 3Q16 and 4.7 billion in 2015 (2.0% of GDP). Our own seasonal adjustment shows the current account deficit is even lower at the margin, at 0.7% of GDP (1.9% in 3Q16), recording the smallest deficit since 3Q14. The trade balance of goods and services recorded a USD 2.1 billion surplus in the year (2015: 47 million surplus) due to higher copper prices and a weak internal demand. Foreign direct investment shrunk to USD 12.2 billion in 2016 (4.9% of GDP), from USD 20.5 billion in 2015 (8.4% of GDP), the lowest value (in dollar terms) since 2006. With higher copper prices and internal demand set to remain weak, Chile’s current account deficit will likely remain at low levels in the short-term. We expect a current account deficit of 1.6% of GDP this year. Full Report
  • We expect the central bank of Colombia to cut the policy rate by 50 basis points this Friday (to 6.75%). Inflation for the month of February, when the full impact of the increase sales tax was expected, surprised to the downside and indications suggest it will drop below 5% this month as the reversion to the 2%-4% tolerance range persists. Subsequently, the results from the central bank’s monthly survey showed a retreat in all the measured horizons. Only the short-term expectation of yearend inflation in above the tolerance range at 4.4%, but it dropped 20-bp from the previous survey. The 12-, 24-month and yearend 2018 inflation expectations declined from the February survey with the 24-month forecast at 3.2%. As of February, the ex-ante real interest rate stood at 3.3%, well above the historical average of 1.7% since 2004. Even with a 50-bp cut this month, the ex-ante real rate will remain restrictive at 3.0%. 
  • We see a rate cut at this meeting as a given, but believe the timing is conducive to speeding up the process of reducing the current restrictive monetary policy amid flagging internal demand. The board has recently placed more weight on the activity slowdown. There will be one more new member in the meeting (Gerardo Hernández) while César Vallejo will not attend – since his replacement José Antonio Ocampo is only taking up the seat in May. Hence, the board will once more consist of 6 members. The February decision to cut rates was by a 4-2 majority. In the event of a possible deadlock, the decision from the previous meeting is adopted.

Market Developments 

  • GLOBAL MARKETS: Volatility gauges increased (mostly in EMs) and US Corporate Credit Spreads went up as investors remain cautious over the first presidential debate in France. In yields, Treasuries decreased as the 5-year went to 1.99% (-3bps) and the 10-year to 2.46% (-4bps). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed and oil prices were broadly stable (Brent: -0.19% to USD 51.66/bbl). In LatAm FX, all the currencies under our coverage appreciated. Since the market was closed, the COP stood flat at 2,913.05/USD. The CLP traded at 660.42/USD (+0.28%). The MXN appreciated 0.40% to 19.00/USD. The BRL outperformed its regional peers strengthening 0.62% to 3.0724/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor increased across the board. Chilean spreads went up 6bps to 76bps, and Mexican increased 11bps to 140bps. Colombian country risk deteriorated to 141bps (+12bps). Brazil CDS increased the most in the region, to 230bps (+17bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields were mixed in the session. In DI Futures, short rates traded range lower, on average (Jan-18: -1bp to 10.00%), the belly went up as the Jan-20 increased 2bps to 9.77% and very long yields edged lower (Jan-27: -1bp to 10.40%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Market closed due to national holiday.
  • LOCAL RATES – Chile and Colombia: In Chile, the curve shifted 2bps downwards, in average. In Camara swaps, the 1-year fell 1bp to 2.87% and the 5-year decreased 3bps to 3.67%. Chile Rates Tracker In Colombia, the market was also closed due to national holiday.

Upcoming Events

  • In Brazil, the IPCA-15 consumer inflation preview for March will be released (Wed.). We forecast a 0.15% m/m rise, with year-over-year inflation decelerating to 4.7% from 5.0%. Then, FGV’s industrial business confidence preview for March will be released (Thu.), for which we expect a 2.5% m/m rise in seasonally adjusted terms, consistent with the 2.9% rise in the CNI confidence release. Moreover, external accounts data will be published (Fri.). We expect a current account surplus of USD 400 million in February, above the USD 1.9 billion deficit in the same month last year. Also, we expect direct investment in the country (former FDI) to sum up to USD 4.5 billion in February. Finally, February’s tax collection may be released sometime during the week. We forecast BRL 93 billion in tax collections, or a 1.1% increase in real terms. 
  • In Mexico, the statistics institute (INEGI) will publish Q4’s aggregate supply (Tue.). We expect to grow at the pace of 2.0% y/y (3Q16: 1.6%). Then, INEGI will publish CPI inflation figures for the first half of March (Thu.). We expect bi-weekly inflation to advance 0.25%, driven by the lagged effects of the Mexican Peso’s depreciation and higher agricultural prices, partly offset by a decrease of gasoline prices. Assuming our forecast is correct, headline inflation would post 5.18% year-over-year in the first half of March (up from 5.02% in the second half of February). Ending the week, INEGI will announce the growth rate of January’s retail sales (Fri.), which we forecast at 7% y/y (December: 9%). 
  • In Colombia, the highlight of the week will be central bank’s monthly monetary policy meeting (Fri.). We believe the conditions are conducive for the central bank to speed up the easing process by cutting the policy rate by 50 basis points to 6.75%. Then, Fedesarrollo will publish the February retail and industrial confidence levels (Thu.). We expect confidence levels to be strained ahead as economic activity remains at low levels. Moreover, the January activity coincident indicator (ISE) will be published (Fri.). As the economy adjusts to the terms of trade shock, growth decelerated in 2016 (December 2016: 1.0% y/y).

Latam Macro Calendar

For details, refer to our Monthly Strategy Report

Today's editors: Eduardo Marza, Pedro Correa

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