Itaú BBA - Evening Edition - Banxico increased its policy rate to 8.25%

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Evening Edition - Banxico increased its policy rate to 8.25%

December 20, 2018

Amid rising upside risks to inflation, we expect an additional 25-bp in the 1Q19

Talk of the Day


Banco de Mexico (Banxico) board members voted unanimously to increase its policy rate by 25-bp to reach a level of 8.25%, in line with our expectations and that of most market analysts. The board perceives the balance of risks for inflation continue to be tilted to the upside and deteriorated further. In this context, in the concluding remarks of the press statement, the board leaves the door open for further rate hikes, as it mentions, just like in the previous decision, further tightening of monetary policy can be needed so that headline inflation converges to Banxico’s target.

Upside risks to inflation come from domestic policies of the new administration and other internal and external factors that pressure the currency. The board sees inflation facing structural upside risks from the implementation of policies of the new administration. In particular, the statement mentions the risk of overall wage revisions above productivity (affecting employment and prices) after the recent increase in the minimum wage (an increase of 16%). We note that the communique doesn’t mention the recent government announcement of a successful deal with airport bondholders, which helped to appreciate the exchange rate.

Banxico recognized a reasonable macro framework in the 2019 Budget. The Board acknowledged that the fiscal targets of the 2019 Budget were estimated with reasonable macroeconomic estimates, which had a positive impact on domestic markets, and highlighted the importance of reaching those targets.

Amid rising upside risks to inflation, we expect an additional 25-bp in the 1Q19.  Today’s statement leaves the door open for further hikes in 2019 as the balance of risk for inflation is tilted to the upside. Besides potential effects on inflation from new domestic policies, Banxico will monitor the still high level of inflation, monetary policy tightening in the U.S., and remaining uncertainties over the approval in the U.S. congress of the renegotiated NAFTA. However, considering there was no vote for a hike larger than 25-bps and the already high level of interest rates, a hike in the next meeting is far from a done deal, but the minutes will likely shed more light on the probability of new rate increases and their timing.

Retail sales decelerated in October, but are still growing at a decent pace. Retails sales posted a growth rate of 3.0% yoy in October (4.1% in September), below our forecast and median market expectations (3.9%). According to calendar-adjusted data reported by the statistics institute (INEGI), retail sales grew 2.1% yoy in October (from 5.1% in September), taking the 3 month moving average (3mm) growth rate to 3.5% yoy in the quarter ended in October (from 4.2% in September).

We expect the labor market to continue supporting consumption growth in the short term. However, downside risks to private consumption (and activity in general) have increased, as uncertainty over future domestic policies could weight on the currency, inflation, confidence and investment at a time that monetary policy is tight and could be tightened further. 

Tomorrow’s agenda: INEGI will publish CPI inflation figures for the first half of December at 12:00 PM. We expect bi-weekly inflation to post 0.30% (from 0.44% a year ago), with the 12-month reading receding to 4.70% (from 4.87% in the second half of November). At the same time, INEGI will publish October’s monthly GDP proxy IGAE, for which we expect a 2.5% growth in yoy terms.


The inflation report of December 2018 shows forecasts which are consistent with stable Selic rate at the current level of 6.5% pa throughout 2019, at least, barring new shocks. Indeed, in the reference scenario, with constant Selic rate and constant exchange rate, inflation forecasts are 4.0% for 2019, 4.0% for 2020 and 4.1% for 2021 (compared to the targets of 4.25% for 2019, 4.00% for 2020 and 3.75% for 2021), showing the need for rate hikes only in 2020. We see the report as fully consistent with our own forecast of stable Selic rate in 2019 and policy normalization starting only sometime in 2020.

CAGED formal job creation came in at +58.7k in November, above our call (+36k) and market’s (+30.7k). According to our seasonal adjustment, there was an 82.5k formal job creation (the highest print since October 2013), taking the 3-month moving average to 71k (from 63k in the previous month). The sectorial breakdown shows gains in the 4 main sectors (services, commerce, manufacturing and civil construction).  All in all, November’s result continues to signal a formal labor market improvement, seen since the 3Q18.

According to FGV’s industry survey preview, business confidence in the industrial sector rose 0.2pp in December to 94.5. The breakdown shows an increase in current conditions (0.9pp) partially offset by weaker expectations (-0.3pp). The small increase disappoints again, given that industry remains the only survey to not show strong gains following the election (others are consumer, commerce, services and construction).  Another result that highlights the weakness of the ongoing recovery is the preview of the capacity utilization (NUCI), which fell 0.9pp in December to 74.3. The 1.8pp accumulated decline since October virtually erased gains shown in 2018, going back to levels shown amid the recession. The final survey will be released on December 27.

Tomorrow’s agenda: December’s IPCA-15 inflation will be released at 9:00 AM. We forecast a 0.12% monthly decrease, leading the full-2018 IPCA-15 reading to 3.90% (from 2.94% in 2017). In addition, we expect the current account (Fri.) to post a USD 3.0 billion deficit, above the USD 2.2 billion deficit seen in November last year. Direct investment in the country will likely amount to USD 11.0 billion in November, leading the 12-month reading to USD 81 billion (4.2% of GDP). Finally, FGV’s confidence surveys for December on consumers will be released at 8:00 AM.


The revised version of the financing law bill has been approved by Congress and will come into effect in January following the signing into law by President Duque. The financing law does not include the initial and controversial provision that would have increased VAT rates for food staples. In the end, intense negotiations among several political parties yielded a watered-down version of the bill, which would ultimately raise some COP 7.8 trillion in revenue (0.7% of GDP), significantly less than the COP 14 trillion (1.3% of GDP) needed to cover the shortfall in the 2019 budget. A surcharge on profits from the financial sector helped lift the expected revenue collection (from COP 7.0 trillion reported in our recent monthly scenario review). The bill revises personal income tax brackets, es tablish an additional marginal income tax rate of 39% and imposes a 1.0% wealth tax on those with net worth of COP 5 billion (USD 1.7 million) or more. The tax rate on capital gains (dividend payments) exceeding COP 10 million would increase to 15% from 10%, tallying up the collection. The bill also includes higher taxes on beer and carbonated soft drinks, which are projected to bring in another 0.1% of GDP. Additionally, the government wants to tax sales of premium real estate (additional 0.1% of GDP). Finally, improvements in tax administration are projected to contribute close to another 0.1% of GDP.

The bill also includes some tax benefits for corporations and foreign investors. Companies would benefit from a lowering of corporate income tax rates from 33% to 30% (to be implemented gradually between now and 2022), which would have an estimated fiscal cost of 0.3 pp of GDP when fully implemented. Partially offsetting this decrease in revenue would be an increase in the capital gains tax rate for non-tax residents of Colombia, from 5% to 7.5%. The withholding tax from government-bond interest payments to foreigners was lowered from 14% to 5%. This provision would likely incentivize portfolio investment in Colombian public debt.

Given the passing of a diluted reform, Finance Minister Carrasquilla acknowledged that some expenditures cuts will be announced in the first week of January, while spending freezes will be implemented elsewhere. The 2019 fiscal deficit target is 2.4% of GDP, down from 3.1% this year and the minister remains optimistic that it could be met. Rating agencies remain vigilant about developments on the fiscal front, with Fitch recently reaffirming its BBB rating and Stable outlook on Colombian public debt. The agency argued that a financing shortage would likely force the government to scale back expenditures to comply with the fiscal rule, something that will surely be on the minds of authorities as they consider their alternatives. Meanwhile, S&P retained its BBB- rating with a stable outlook (meaning that a do wngrade would lead to a loss of investment grade), and took a softer approach stating that the possibility that Colombia might not meet the mandated 2.4% of GDP deficit target next year would not necessarily prompt the agency to immediately downgrade the country’s debt rating.

Tomorrow’s agenda:The central bank will hold its final monetary policy meeting of 2018. We expect stable rates remaining likely for still some time. At 5:00 PM, the coincident activity indicator (ISE) for the month of October will be released, for which we expect a 3.6% yoy increase, boosted by industrial production. Finally, think-tank Fedesarrollo will release November Industrial and Retail confidence indices.

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