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Evening Edition – BCB Inflation Report: Forecasts still point to stable Selic rate in 2019

March 28, 2019

BCB released its 1Q19’s quarterly inflation report.

Talk of the Day


BCB released its 1Q19’s quarterly inflation report. The report shows inflation forecasts that are consistent with the stability of the Selic rate, at the current level of 6.5% pa, throughout 2019, in the absence of further shocks and/or disappointments with economic activity. Indeed, in the reference scenario, with constant Selic rate and exchange rate, inflation forecasts are 4.1% for 2019, 4.0% for 2020 and 4.1% for 2021 (against targets of 4.25%, 4.00% and 3.75%, respectively), showing no need for interest rate increases before at least 2020, and in line with our scenario of a stable Selic rate in 2019.
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The central government posted a BRL 18.3 billion primary deficit in February, close to our call and a little worse than market consensus (at BRL -17.8 and 16.7 bln, respectively). Compared to our expectations (see table below), revenues came 0.9 BRL bln and expenditures 0.4 BRL bln lower than expected, the latter, especially due to social security benefits, which suggest that the policy of revising benefits continues to yield savings to the government. Central government result will likely be around BRL 35 bln (0.5% of GDP) better than the target for the year (BRL 139 billion or 2.3% of GDP). The loose fiscal target is explained by the government’s conservatism in changing it last year, amid uncertainty over GDP growth this year and lower mandatory and discretionary spending than previously forecasted in the budg et.

Confidence in the retail sector receded 3.2 p.p. in March, the lowest reading since October 2018. The index accumulates a loss of 8.3 points in the last three months. These drops, both in the current situation and expectations components, reinforce the scenario of slow recovery in the sector influenced by the high level of uncertainty and the reduction of consumer confidence published this week. All in all, the result reinforces our view of weak growth in early 2019. The economic uncertainty index declined 1.9% to 109.2, remaining slightly above the 1Q18 average. 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.

Tomorrow’s Agenda: PNAD national unemployment rate will be released at 9:00 AM. We forecast a 0.4 p.p. increase on unemployment rate to 12.4% (down 0.1 p.p. to 12.2% adjusting for seasonality). Also, FGV’s business confidence surveys for March on industry (final reading) and services will be released. Additionally, on fiscal accounts, we expect the consolidated public sector primary budget balance to post a BRL 15.5 bn primary deficit in February.


Banco de Mexico (Banxico) board members voted unanimously to leave the policy rate unchanged at 8.25%, in line with our expectations and market analysts. The tone of the statement didn’t change significantly compared to the last monetary policy decision statement (February 7). The Board still mentions that they will take the necessary actions so that the reference rate is kept at a level consistent with the convergence of headline inflation to Banxico’s target. The balance of risks for inflation continues to be tilted to the upside. Although downside risks to inflation have intensified, there are still other factors that might put upward pressure on inflation in greater magnitude and deviate it from its expected path. On the downside risks to inflation, the statement mentions lower price increases in so me of th e goods included in the non-core subindex or greater than expected slackness conditions. However, the Board is still worried about persistence in core inflation, in addition of internal and external factors pressuring the exchange rate (and in turn inflation), the effect of the minimum wage hike in overall wage revisions (if they exceed productivity gains) and a deterioration of public finances.

Although Banxico acknowledged favorable international conditions prevailed, current environment continues to pose risks, while Mexico’s economy continues to show weakness.Among the risks mentioned are those related to the credit rating of Pemex and to Mexico’s sovereign debt. Regarding economic activity, Mexico’s economy continued registering low growth as a result of the slowdown of the world economy, some weakness in domestic demand, and transitory factors that might have affected growth during the first quarter of the year. We expect Banxico to deliver two 25-bp rate cuts in the last quarter of 2019. Rate cuts in the short term are not expected given that Banxico’s inflation balance of risks continues to be tilted to the upside (although they recognized downside risks to inflation have intensified). Looking forward, we believe that with inflation falling within the target range, growth below potential and a looser monetary policy stance of the Fed, the central bank will have room to start a gradual normalization cycle, as long as uncertainty abates (and, consequently, risks for inflation fall).
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According to think-tank Fedesarrollo, both industrial and retail confidence remained upbeat, improving from one year ago, a favorable development for the continuance of the activity recovery. Industrial confidence was 5.1% in February (0 = neutral), up from 1.9% one year earlier (6.3% in January). The improvement from February 2018 was mainly explained by expectations for production in the upcoming quarter, improving from 32.9% to 42.2%, while the volume of orders was less disappointing (-22.8% from -24.9% one year ago). Regarding capacity utilization, there was an increase over the twelve-month period, meanwhile construction dynamics and perception of the sector also showed an improvement. On the other hand, retail confidence remains upbeat and reached the highest reading since August 2006, coming in at 31.8%, compared to 20.5% one year ago (29.3% in January). The improvement from last year was explained by all three components: a reduction in inventory levels, better expectations of the economic situation in the coming semester (46.0% vs. 37.2% last year) and the evaluation of the current situation (50.5% from 37.0% in 2018). Going forward we believe low inflation, along with an slightly expansionary monetary policy will maintain industrial and retail confidence upbeat and support a continuation of the recovery. We expect a growth acceleration this year to 3.3%, from 2.7% in 2018.

Tomorrow’s Agenda: The institute of statistics will release the unemployment rate for February, which we expect to come in at 12.0% (11.9% one year before).


Tomorrow’s Agenda: The national institute of statistics (INE) releases industrial activity indicators for February. We expect manufacturing to grow 2.2% yoy aided by a lower base of comparison. On the same day, INE releases the national unemployment rate for the quarter ending in February, which we expect to come in at 7.0%, above the 6.7% recorded one year before. Additionally, the central bank will announce its monetary policy rate decision. Following the first rate hike in October, the board unanimously decided to implement a second hike to 3.0% in January. Nevertheless, the minutes of that meeting showed a board growing more cautious. We believe that on the wake of the publication of the inflation report (April 1), in which the central bank will likely address uncertainty over inflation dynamics and assess the impact of a risky external scenario on domestic activity, the board will act with caution leaving rates unchanged for now.

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