Itaú BBA - BCRP remains on hold, as expected

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BCRP remains on hold, as expected

December 14, 2018

The statement kept a cautious stance on financial conditions and global economic activity (due to trade war risks)

Talk of the Day

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


The Central Bank of Peru (BCRP) decided to keep the reference rate at 2.75% in December, in line with our forecast and market expectations (as per Bloomberg).  According to the statement, inflation indicators are inside the range around the 2% target and economic activity indicators show an improvement in 4Q18 (previous statement mentioned temporary signs of less dynamism), but it continues to recognize that economic activity is below its potential. The statement kept a cautious stance on financial conditions and global economic activity (due to trade war risks).

The Central Bank expects annual inflation to remain around the 2.0% target. However, the Board considers appropriate to maintain an expansionary monetary policy as long as inflation expectations remain anchored in a context of below-potential economic activity growth. 

We expect the BCRP to deliver two additional 25-bp rate hikes after the 1Q19. While the central bank seems more comfortable with 4Q18 economic activity figures, after a temporary deceleration in the 3Q18, we think the central bank can afford to wait before removing its stimulus (given well-behaved inflation) and have more clarity on the economic outlook.


After a drop in September, core retail sales slid again, by 0.4% mom/sa in October, printing below the median of market expectations (0.0%) and slightly below our estimate (-0.3%). Compared to October 2017, core sales went up by 2.0%. Broad retail sales retreated 0.2% mom/sa, also disappointing the median of market expectations (0.6%) but matching our forecast. Compared to October 2017, broad retail sales climbed 6.3%. Notwithstanding the latest monthly decline, the quarterly change accelerated, especially the broad metric. This pickup reflects the effect of the truckers’ stoppage on the comparison base rather than faster underlying growth.

Coincident indicators out so far (vehicle sales, surveys with consumers and retail entrepreneurs, Serasa retail index, inquiries to credit protection service SCPC) point to stagnated core and broad retail sales in November, in seasonally-adjusted terms. Importantly, November sales volumes are usually boosted by Black Friday sales, but this effect is increasingly captured by the seasonal adjustment, as these promotions have been impacting the headline result since 2016.
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Day Ahead: October’s Service Sector Survey (PMS) will be released at 9:00 AM (SP Time). Our forecast points to a 1.9% yoy increase (matching consensus estimates).


Monthly inflation decelerated in November, from the previous months, but by less than expected. Consumer prices rose 3.2%, above the 2.8% Bloomberg consensus forecast, but well below the 5.4% MoM and 6.5% MoM rises registered in October and September, respectively. Annual inflation rose to 48.5% in November, but the annualized three-month measure decelerated to 80.0% in the month. Consumer prices rose 43.9% during the first eleven months of the year. Core item prices rose 3.3% MoM, led by food and non-alcoholic beverages (3.4%). Annual core inflation came in at 46.2%, while the annualized three-month measure remained almost flat from the previous month, at 82.7%. The persistently high core measure indicates that the pass-through continued to affect consumer prices in November.

We expect some disinflation in December. Price-tracker consulting firm Elypsis estimates a 2.2% MoM increase in consumer prices for the last month of the year, due to a lower statistical carry-over from November and a minor incidence of regulated prices. Besides this, the central bank reinforced its commitment to a tight monetary policy introducing downward adjustments to the December monetary aggregate target. We forecast inflation will hit 48% this year.
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Macro Scenario: AMLO’s government begins. AMLO was sworn in as President, criticizing the neoliberal economic model implemented in Mexico over the last two decades during his first speech. He also promised responsible public finances and that he would respect Banxico’s autonomy. More public consultations on policy issues are expected. Also, domestic markets were rattled after several radical legislative initiatives emerged from Morena’s coalition (although most of them don’t have AMLO’s support). We expect economic activity to grow 2.0% in 2018. However, we are revising our growth expectation down for 2019 and 2020, to 1.7%, as the U.S. economy decelerates and uncertainty over domestic policy direction hits business confidence and investment, which are also affected by worse financial conditions. November’s headline inflation surprised to the upside, reinforcing our call for an additional 25-bp hike in Banxico’s next monetary policy decision (December 20). Moreover, we expect an additional 25-bp hike in 1Q19, amid increasing risks for the currency and, consequently, inflation.
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Day Ahead: The Central Bank of Mexico (Banxico) will publish December’s Expectations Survey at 1:00 PM (SP Time). We expect the survey will continue to reflect (as in November’s survey) a depreciated exchange rate in 2018 and 2019 and lower GDP growth rate (in 2019) due to the uncertainty generated over future economic policy direction of the new administration. Moreover, we expect the survey also to reflect the expectation of a more restrictive monetary policy rate in the coming months.


Macro Scenario: Confirming a gradual monetary policy normalization cycle. Despite the slowdown of activity in 3Q18, growth will be solid this year due to the strong first half. In fact, we are revising our growth expectation up by 0.1pp, to 3.9%. Persistent headwinds (ongoing global trade uncertainties and lower confidence levels) could hamper the growth outlook for next year (we currently expect 3.5%). Weaker trade data and downward revisions of our copper price outlook led to an increase in our current account deficit forecasts. We now expect a deficit of 2.6% of GDP this year (2.4% previously). Some further widening, to 2.7%, is expected for next year. Inflation is likely to remain low as global oil prices plummet and demand-side pressures remain muted. We now expect inflation to end the year at 2.7%, with no monthly variation expected in December (from 3% previously). The low inflation readings at the end of this year put a downside bias on our 3% inflation forecast for the end of 2019. With no relevant sources of inflationary pressures and a still-risky external scenario, the monetary policy normalization cycle will be gradual, as evidenced by the decision to remain on hold in December, following the first hike of the cycle in the previous decision. We see the policy rate at 3.75% by the end of 2019, with the next rate hike in 1Q19.
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Day Ahead: Activity indicators for the month of October will be published at 1:00 PM (SP Time). We expect industrial production to increase 3.8% yoy (consensus: 3.9%). Meanwhile, firm auto sales in the month point at still robust retail sales growth of 5.0% (consensus: 5.5%).

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