Itaú BBA - Brazilian Central Bank reduces reserve requirements

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Brazilian Central Bank reduces reserve requirements

March 29, 2018

According to the BCB, the measure has potential to induce a reduction of the cost of credit.

Talk of the Day 


The Brazilian Central Bank, under the BC+ program, reduced the reserve requirement for demand deposits to 25% from 40%. It also reduced the reserve requirement for rural savings deposits to 20% from 21% and to 20% from 24.5% for other savings modalities. The Brazilian central bank also changed the way that the banks can fulfill their reserve requirement  - deposits from government and bank notes (cash) will no longer be deduced from the reserve requirements. The BCB expects to foster the use of electronic payment instruments. According to the BCB statement, this measure will reduce the reserve requirement by about BRL 26 billion and has potential to induce reduction of the cost of credit.

The consolidated public sector posted a primary deficit of BRL 17.4 billion in February, in line with our forecast (-17.2 billion) and market consensus (-17.4 billion). The consolidated primary deficit accumulated over 12 months shrank to 1.4% of GDP from 1.5%. The central government’s result, as published by the National Treasury, was a deficit of BRL 19.3 billion (our estimate: -20.0 billion). The highlight of the month was the maintenance of low discretionary expenses. Regional governments posted a surplus of BRL 2.0 billion, while state-owned companies had a deficit of BRL 0.4 billion (we anticipated a surplus of 4.5 billion and zero, respectively). Results reinforce that meeting primary targets in 2018 will be less challenging than in recent years.

The general government’s gross debt reached 75.1% of GDP in February, while the public sector’s net debt hit 52.0% of GDP. Notwithstanding still-negative annual primary results, the repayment by development bank BNDES of BRL 130 billion to the National Treasury, better economic growth and lower real interest rates will keep gross debt as a share of GDP virtually stable in 2018. However, without reforms (such as the pension reform), fiscal readings will resume a worsening trend from 2019 onward. ** Full Story here.

FGV has released its monthly services survey and the uncertainty index. Confidence in the services sector fell 1.8% in March to 91.4, interrupting a sequence of 8 consecutive increases. The decline was driven by both expectations (-2.8%) and the current condition assessment (-0.7%). Nonetheless, we note that all other confidence indexes rose in March, and the expectations component are well above current conditions (suggesting additional gains ahead). FGV’s economic uncertainty index rose 5.2pp to 107.7 in March. The survey is relevant for mapping part of the economic agents’ risk aversion that was not explained by traditional financial conditions indicators, given that the analysis of newspaper accounts for 70% of the aggregate index. A high figure is associated with greater uncertainty that is negatively related to economic activity.

Day Ahead: The Central Bank’s Inflation Report will be released at 8:00 AM (SP Time). The national unemployment rate will hit the wires at 9:00 AM (SP Time) – we and the consensus expect it to increase 0.4 p.p. to 12.6%.


The EMAE (official monthly GDP proxy) posted a solid gain in January. Activity expanded 4.1% yoy in January, above market expectations (2.9%) and our forecast (2.5%). On a sequential basis, the economy grew 0.6% mom/sa, a tick higher than the 0.5% increase in December, bringing quarter-over-quarter expansion to 5.2% (annualized) from 4% in 4Q17. Growth was broad-based and led by Construction. The sector increased 14.3% in January. Agriculture and primary activities increased by 9.6%, followed by the Service sector (3.2%) and Manufacturing (2.7%). In the quarter ending January, Construction grew 14.3% yoy, followed by primary activities (5.4%), the Service sector (2.9%) and Manufacturing (2.5%).

Activity indicators available for February point to a solid expansion in 1Q18. The GDP proxy estimated by OJF consulting firm showed an increase of 5.1% yoy for the first two months of the year, while the industrial production index (produced by FIEL) gained 4.8% in the same period. The leading activity indicator (ILA), published by the central bank, anticipates a 0.7% sequential gain for 1Q18 (adjusted for seasonality). Looking ahead, we expect some deceleration in 2Q18 due to the negative impact of a severe drought on the Agricultural sector. We forecast GDP growth of 2.8% this year, supported by a better global economic outlook (including a recovery in Brazil) and positive sentiment for investment after a strong showing by the government coalition in the midterm elections. ** Full Story here.


Labor market data remains disappointing in Colombia and reaffirms that the expected consumption recovery is not exempt of risks. The February national unemployment rate of 10.8% was 0.3 percentage points above the rate one year ago. Higher-than-anticipated urban unemployment explained the difference between our 10.4% forecast for national unemployment in the month. The urban unemployment rate was 11.9%, above the Bloomberg market consensus of 11.2% and our 10.8% expectation. Additionally, falling urban participation and job destruction continue to reflect a loosening labor market.

We see an activity pick-up to 2.5% this year, from the 1.8% for 2017, aided by an improvement in real wage growth (with the advancement of disinflation), expansionary monetary policy and favorable external conditions (supporting oil prices). But recent activity figures show downside risks to our estimates. ** Full Story here.


Day Ahead: The national statistics agency (INE) will publish the industrial activity indicators for February at 9:00 AM (SP Time). We expect manufacturing production to recover to 6.0% year-over-year (consensus: 5.9%). Also at 9:00 AM (SP Time), INE will release the national unemployment rate for the quarter ending in February. We see the unemployment rate reaching 6.5% in the quarter (consensus: 6.6%).

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