Itaú BBA - A more benign global environment for rates

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A more benign global environment for rates

March 15, 2019

Emerging Markets as a group have benefitted from a more benign global rates environment, and central banks felt less compelled to raise rates

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

Global Economy
Global growth to stabilize
With a likely U.S.-China trade deal and a global growth stabilization, financial inflows to emerging markets should continue in 2019.

LatAm
Sluggish activity
Inflation outlook remains comfortable for most countries in the region, but activity has been disappointing in the core economies.

Brazil
New central bank governor assumes amidst an uncertain outlook
The new central bank administration and the pension reform progress in Congress will be important to set the prospective trajectory of interest rates.

Argentina
Heavy clouds but no rain
Central bank tightens monetary policy amidst weakening peso and renewed inflationary pressures, but disinflation remains challenging.

Mexico
Policy rate cuts in 4Q19
Growth below potential and falling inflation grant margin for the central bank to start a gradual monetary rate normalization cycle.

Chile
Low inflation for longer
Inflation is likely to remain low this year, and activity looks set to underwhelm. Given this outlook and a seemingly weaker global growth, we now see only one additional rate hike this year, to 3.25%.

Peru
Economic activity improves, given solid external and fiscal accounts
We forecast 4.0% GDP growth in 2019, assuming global trade tensions dissipate and a still-expansionary monetary policy.

Colombia
External accounts once again in the spotlight
The current account deficit halted its correction process in 2018, affected by lower oil prices. We expect a worsening of the deficit this year, leaving the country vulnerable to external financial conditions.


 


A more benign global environment for rates

The U.S. activity slowdown at the turn of the year has further justified Fed’s patience in delivering “further adjustments” to the Fed Funds Rate. In China, growth is likely to stabilize in 2Q19, with the provision of modest domestic stimulus and given the soon-to-be-reached trade deal between U.S. and China, which could revert some of last year´s tariff increases and may improve China´s business and consumer confidence. In Europe, we expect growth to decelerate to close to potential this year, which will imply a longer convergence of inflation towards the target and places ECB´s normalization under question. 

In that context, Emerging Markets as a group have benefitted from a more benign global rates environment, and their central banks felt  less compelled to raise rates, with some may even likely to enter an easing cycle this year. In Latin America, sluggish growth and well-behaved exchange rates brings a comfortable inflation outlook almost everywhere. In Mexico, where we reduced our growth forecasts, we now expect rate cuts by the end of this year. We also see a more gradual tightening cycle in Chile and Colombia relative to our previous scenario. 

For Brazil, the lower-than-target inflation outlook may create space for rate cuts, but more clarity on the pension reform is needed before the central bank contemplates resuming the easing cycle. In that regard, it will also be important to follow the first communications of BCB´s new leadership, starting from next week´s interest rate decision. We have kept our growth forecasts at 2.0% for 2019 and 2.7% in 2020, but sluggish economic activity earlier in the year brings downside risks to these projections. The pension reform remains as a key determinant of the economic outlook. We assume the approval of a package that has a fiscal impact of 50% to 75% of the proposal sent by the government to Congress. Deviations from this basic hypothesis may lead to substantial changes in our scenario; be it in the positive direction, in the case of a reform that is more comprehensive than expected; or in the negative direction, in case of frustration.


 


Global Economy
Global growth to stabilize

• U.S.-China likely to reach a trade deal that could revert some of last year’s tariff increase.

• U.S. GDP to decelerate to 2.1% in 2019. 

• China activity will likely stabilize in 2Q19 with a trade deal and domestic stimulus. 

• Euro-area growth around potential puts ECB normalization under question.

• Emerging markets: as global growth stabilizes, financial inflows will likely continue. 

• Higher iron ore prices.


 


LatAm
Sluggish activity

• With poor economic growth in the core economies, activity in the region has been disappointing. For 2019, we reduced our growth forecasts for Argentina and Mexico, while the downside risks to our GDP projections for Brazil are increasing.   

• With sluggish growth and well-behaved exchange rates, there is a comfortable inflation outlook for most countries in the region. We now expect rate cuts in Mexico by the end of this year and see a more gradual tightening cycle in Chile and Colombia relative to our previous scenario. For Brazil, the inflation outlook may eventually make room for rate cuts, but greater clarity on the pension reform will be needed before the BCB resumes the easing cycle.   


 

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


 



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