Itaú BBA - Banxico minutes: Inflation outlook still concerns board members

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Banxico minutes: Inflation outlook still concerns board members

April 12, 2019

We expect Banxico to deliver two 25-bp rate cuts in the last quarter of 2019.

Talk of the Day

Our LatAm Macro Monthly report will hit your mailboxes today, featuring scenarios for Brazil, Mexico, Argentina, Chile, Colombia, Peru, the global economy and commodities.

Mexico

The central bank of Mexico (Banxico) published the minutes of March’s meeting, held two weeks ago, when board members voted unanimously to leave the policy rate unchanged at 8.25%. The minutes indicate that most board members are still worried with the inflation outlook. Slack conditions in the economy are expected by most members to widen over the next quarters, with one board member advocating to adjust down rates in the short term. One board member considered that keeping a tight monetary policy could eventually contribute to generate undesired downward pressures on economic activity. He argued that, depending on how inflation behaves in the coming weeks – given that the balance of risk for growth is clearly biased to the downside and the level of interest rate is consistent with the convergence of inflation to the target – Banxico will have room to begin a downward adjustment in the policy rate in the near future.

We expect Banxico to deliver two 25-bp rate cuts in the last quarter of 2019. Rate cuts are not expected in the short term, given the central bank’s belief (from most board members) that the balance of risks for inflation remains tilted to the upside. Looking forward, we believe that, with inflation falling further within the central bank’s target range, below potential growth and a looser monetary policy stance by the Fed, the central bank will have room to start a gradual normalization cycle, as long as uncertainty abates and the risks for inflation fall.
** Full story
here.

On activity, industrial production (IP) was in line with expectations. IP fell 0.8% yoy in February (from -1.0% in January), in line with our forecasts and market expectations. Adjusted by calendar effects, IP growth rate was similar to the headline figure, taking the 3 month moving average (3mma) growth rate to -1.5% yoy in February (practically unchanged from last month). With seasonally adjusted figures, industrial production decelerated to 0.3% mom in February (from 0.7% in January). For 2019, we expect economic activity to slow down to 1.4%, from 2.0% in 2018. Uncertainty over the direction of domestic policy and the approval of the USMCA by the U.S. Congress will continue to weigh on investment. Deceleration in the U.S. economy will also curb growth. In this context, employment is already weakening. On the other hand, recent real wage increases are a buffer for activity, sustaining the real wage bill and consumption.
** Full story
here.

Macro Scenario: The Ministry of Finance (MoF) updated its fiscal estimates, reinforcing its commitment to responsible public finances, but execution is still a risk. Achieving fiscal targets will depend on the ability of AMLO’s administration to reduce expenditures, despite the promise of additional social and capital spending. GDP and oil output also pose a risk to revenues. The year started off with weak economic activity, but inflation is slowing down. We believe that with inflation falling further into the central bank’s target range, below-potential growth and a looser monetary policy stance by the Fed, Banxico will have room to start a gradual normalization cycle in 4Q19. The MoF is considering using part of its stabilization fund to pay down part of PEMEX’s debt and avoid refinancing this year. The measure would require a change in the Fiscal Responsibility Law, which should not be a problem for the Morena coalition because amending the law requires only a simple majority.
** Full story
here.

Chile

Macro Scenario: Despite weak activity expected for 1Q19, growth for the year is likely to be near potential levels, at 3.2%. Activity grew 4% in 2018, in line with expectations, led by mining investment. Our scenario for copper prices is still consistent with robust investment (although delays in the approval of tax reform pose some risk for capital spending), while low inflation and the retention of monetary stimulus would favor the consumption environment. A sharp widening in the current account deficit was registered last year, but the fact that import growth is associated with stronger investment in the tradable sector reduces risk for the exchange rate. We expect the current account deficit to remain wide this year, at 3% of GDP (2.7% in our previous scenario; 3.1% in 2018). Despite the wide levels of the external deficit, our models (which take into account copper prices, DXY and interest rate differentials, among other factors) suggest room for some appreciation of the Chilean peso. However, we now see the CLP at 655/USD by the end of this year (from 645 in our previous scenario). The central bank’s view is that risks are tilted to the downside for the external scenario and the slower inflation convergence path provides room to retain monetary stimulus for longer. We still expect only one further 25-bp rate hike near the end of this year, taking the policy rate to 3.25%. However, one less hike is now expected for next year (with the base rate expected to end the year at 3.75% versus 4.0% previously).
**Full story
here.

Brazil

Day Ahead: February's service revenues will be released at 9:00 AM. Our forecast is a 0.2% mom growth, leading to a 5.1% increase on year-over-year terms.

Colombia

Day Ahead: February’s activity indicators will be published at 12:00 PM. We expect industrial production to remain in positive territory, with growth of 1.8% yoy (3.0% in January), given the still upbeat confidence levels. Retail sales are likely to grow 5.0% in the twelve-month measure (3.0% in January), as auto sales returned to positive territory after the negative print in January.



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