Itaú BBA - BCB ready to resume easing, conditional on reform

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BCB ready to resume easing, conditional on reform

June 21, 2019

We will learn more about the authorities´ views with the release of the meeting minutes at 08:00 AM on Tuesday, June 25

Talk of the Day


The Copom decision to leave the base rate unchanged at 6.5% pa was widely anticipated. Its statement opens the way for a resumption of monetary easing, as early as the July 31st policy meeting, provided there is “concrete progress” in the reform agenda. The committee concedes that the economic recovery has stalled and provides forecasts, in the baseline scenario (constant exchange at BRL 3.85 and policy rates at 6.5% pa), that are inconsistent with the target path – 3.7% vs a 4.0% target for 2020. But it rightly cautions that the benign inflation scenario hinges on the reforms. We will learn more about the authorities´ views with the release of the meeting minutes at 08:00 AM on Tuesday, June 25. The central bank´s views will be further outlined with the Quarterly Inflation Report and the accompanying press conference on June 27 (the same day when we´ll learn the inflation target for 2022, which we expect to be set at 3.5%).

We remain constructive with the outlook for reforms, and, as a result, still expect the Copom to resume easing at the July policy meeting, with a 25-bp move, and the base rate to end the year at 5% pa.


The rolling 12-month trade deficit continued to rise as of April, despite a consolidating recovery of oil exports. In the first month of 2Q19, a trade deficit of USD 460 million was recorded, broadly in line with the market consensus, but larger than our USD 345 million forecast and the USD 257 million deficit recorded in April last year. As a result, the trade deficit widened from USD 7.1 billion in 2018 to USD 8.4 billion (USD 8.2 billion as of March). Still elevated capital and intermediate import growth is offsetting mild export gains. At the margin, the trade deficit is at a lower USD 7.6 billion (annualized) in the quarter, as oil exports accelerated.

Day Ahead: At 4:00 PM, April’s monthly coincident activity indicator (ISE) will be published, which we expect to grow 1.9% yoy. Additionally, the central bank will hold its monetary policy meeting. We expect the board to hold the policy rate at 4.25%. General Manager Echavarria has downplayed the recent increase in inflation expectations and noted that the board was comfortable with the COP depreciation in the current volatile environment, but expressed some growth concerns.


Day Ahead: The treasury ministry will publish the federal fiscal accounts for May. We estimate that the 12-month rolling primary deficit fell to 1.8% of GDP in April, from 2.0% of GDP in March.


Day Ahead: At 10:00 AM, the statistics institute (INEGI) will publish Q1’s aggregate supply, which we expect to slowdown, in line with 1Q19’s GDP print (1.2% yoy, from 1.7% in 4Q18). 

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