Itaú BBA - Evening Edition – Activity in Brazil still consistent with Copom´s base case

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Evening Edition – Activity in Brazil still consistent with Copom´s base case

February 12, 2019

The minutes reinforce the case for stable Selic rate at the 6,5% in coming meetings

Talk of the Day


The Copom minutes show that the committee has apparently discussed more extensively the economic activity outlook, and concluded that, when taking into account shocks that took place in 2018, recent developments are consistent with its base case scenario, of a gradual economic recovery. The committee also emphasized that the pace of economic recovery will depend crucially on a reduction of uncertainties regarding reforms, especially those of fiscal nature. Risks are still perceived as being asymmetric to the inflationary side, but have abated, especially due to the external outlook, which now contemplates a possible intensification of the global slowdown. The text also stressed the need for a cautious approach to monetary policy. In sum, the minutes reinforce the case for stable Selic rate at the 6,5% in coming meetings, barring any significant shocks, as well as the impact that reforms may have on monetary policy decisions down the road.  The next event to monitor, on the policy communication front, is the tone and content of incoming governor Roberto Campos’ confirmation speech.

Tomorrow’s agenda: December’s retail sales will be released at 9:00 AM (SP Time). We forecast a 0.3% mom/sa decrease for core retail sales and a 0.1% drop in the broad segment (which includes vehicle sales and construction material).


According the results of the central bank’s analyst survey, a more gradual monetary normalization cycle is expected following weaker-then-expected growth at the close of 2018, and surprisingly low inflation readings when utilizing the new consumer basket. The policy rate forecast for yearend 2019 was lowered to 3.25% (from 3.5% in the previous survey), so only one additional rate hike this year. For the next 12 months, policy rate forecast stood unchanged, at 3.5%, but fell to 3.5% (from 3.75% for the 18-month horizon and to 3.75% (from 4%) for the next two years. Inflation forecasts were revised only mildly for this year, to 2.7% (from 2.8%), while unchanged at 3% for 2020 (also the 24-month expectation). Hence, the market likely sees the low annual inflation print released last week as a transitory occurrence. Growth forecasts ticked down 0.1pp to 3.5% for this year (Itaú: 3.2%). Overall, we are still analyzing what implications the new CPI basked will have on inflation dynamics going forward, but believe that given the uncertainty in the short-term and weaker activity momentum at the beginning of the year, there is motivation for a cautious central bank. We see space for two rate hikes (to 3.50%) by yearend, with stable rates in 1H19, and hikes happening only in the second half of the year.

At the end of January, the budget office revealed that the nominal fiscal balance reached a deficit of 1.7% of GDP in 2018, from 2.8% of GDP in 2017, narrower than the 1.9% deficit forecasted by the government in September. In part, the narrower-than-expected deficit can be attributed to taxes from the sale of a stake in a private mining company as well as some expenditure saving efforts. However, the monthly report of the Pension Reserve Fund shows that the government withdrew a total of USD 525 million during the year, as permitted by law. The authorities indicated they preferred to take advantage of the law rather than increasing debt last year. The is only the second year that the government has withdrawn funds (the previous being 2017: USD 314 million) since the creation of the fund at the end of 2006. The withdrawal is around 0.2% of GDP, suggesting that without such funds the nominal balance would have end 2018 in line with the 1.9% expectations (and somewhat larger if the unexpected mining sale did not occur and favorably affect revenue). Nevertheless, fiscal consolidation is underway, with real expenditure growth slowing to 3.4% last year (4.7% in 2017), the slowest expansion since 2011. Despite the commitment to even lower expenditure growth this year (3.2% yoy budgeted), we see the nominal fiscal deficit broadly stable for the year (1.7%), as copper prices post some retreat and activity moderates somewhat. With the government targeting the stabilization of debt (as a percentage of GDP), rating agencies would likely remain bay (since the preoccupation has been with the speed of the debt increase rather than levels).


The central bank published detailed inflationary measures for January, when inflation remained contained and close to the central bank’s 3% target at 3.15%. These were the first data utilizing the new consumer basket (2018 base year; 2008 previously). Average core inflation dropped to 2.99% (from 3.03% in December). Additionally, tradable good prices (excluding food and regulated items) continued to drag down inflation (1.03% vs. 1.09% previously), while non-tradable prices ticked up to 3.87% (3.79% in December). With the negative output gap prevailing this year, inflation controlled and inflation expectations anchored, we see the board maintaining the monetary stimulus for longer, until the output gap is clearly narrowing. The policy rate is still likely to end the year at 4.75%, but the first hike would only come in 2H19.

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