Itaú BBA - Weak activity and stable currencies leave room for further monetary easing in LatAm

Latam FI Strategy Monthly

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Weak activity and stable currencies leave room for further monetary easing in LatAm

September 13, 2017

We expect a pause in Banrep’s easing cycle, but there are risks of a more front-loaded cycle.

STRATEGY TEAM:

Ciro Matuo, CNPIciro.matuo@itaubba.com
Eduardo Alonsoeduardo.marza@itaubba.com


For the full report, see enclosed file

Highligths

  • We expect a pause in Banrep’s easing cycle, and see rate cuts resuming in 1Q18, as the economy remains weak and inflationary pressures will likely fade ahead.
  • However, the Colombian Central Bank’s communication suggests risks of a more front-loaded cycle, depending on how inflation unfolds.
  • Be that as it may, IBR swaps imply rate hikes coming as early as 4Q18, whereas we anticipate the policy rate at 4.5% throughout the period. We are received in the 18-month IBR swap.
  • Camara swaps staged a hefty correction after BCCh released the 3Q IPoM, with markets reading the report as a signal that, in the most likely scenario, BCCh sees the easing cycle as over.
  • Yet, we underscore the future Chilean monetary policy stance hinges on whether downside risks to inflation materialize. With the economy remaining weak in our view, along with a currency that has strengthened from the beginning of the year, inflationary pressures could remain muted and so the possibility of rate cuts remains open.
  • In Brazil, a recovering economy, and inflation that is at the (likely) bottom of this cycle support the Copom’s intention to slow down and eventually end the easing cycle.

  • For the time being, we see cuts of 75bps in October and 50bps in December, with the Selic at 7.0%, at all-time low, by the end of the year.

MACRO TEAM:

Mario Mesquita - Chief  Economist
Fernando M Gonçalves, fernando.goncalves@itaubba.com
Eduardo Alonso, eduardo.marza@itaubba.com



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