Itaú BBA - Evening Edition – Brazil's Copom is ready to resume easing, conditional on reform approval

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Evening Edition – Brazil's Copom is ready to resume easing, conditional on reform approval

June 19, 2019

The Copom decision to leave the base rate unchanged at 6.5% pa was widely anticipated.

Talk of the Day


The Copom decision to leave the base rate unchanged at 6.5% pa was widely anticipated. Its statement opens the way for a resumption of monetary easing, as early as the July 31st policy meeting, provided there is “concrete progress” in the reform agenda. The committee concedes that the economic recovery has stalled and provides forecasts, in the baseline scenario (constant exchange at BRL 3.85 and policy rates at 6.5% pa), that are inconsistent with the target path – 3.7% vs a 4.0% target for 2020. But it rightly cautions that the benign inflation scenario hinges on the reforms. We will learn more about the authorities´ views with the release of the meeting minutes at 08:00 AM on Tuesday, June 25. The central bank´s views will be further outlined with the Quarterly Inflation Report and the accompanying press conference on June 27 (the same day when we´ll learn the inflation target for 2022, which we expect to be set at 3.5%).

We remain constructive with the outlook for reforms, and, as a result, still expect the Copom to resume easing at the July policy meeting, with a 25-bp move, and the base rate to end the year at 5% pa. 

According to FGV’s monthly industry survey preview, business confidence in the industrial sector decreased 1.4 p.p. to 95.8 in June. The breakdown shows a drop both in the current conditions (-1.8 p.p.) and in the expectations component (-1.0 p.p.). The weak print is consistent with a 0.2% qoq/sa decline in industrial production in the same period. The final survey result will be published next week, on Thursday (27). 


GDP declined 5.8% yoy in 1Q19, after a contraction of 6.1% in the previous quarter (revised from -6.2%), slightly below market expectations of 5.7% and higher than the 6.8% contraction in the official monthly GDP proxy. On a sequential basis, GDP decreased by 0.2% qoq/sa, leaving a negative statistical carryover of 2.5% for 2019. Domestic demand (excluding inventories) fell by 12.0% yoy and 1.6% qoq, led by a steep 24.6% yoy decline of gross fixed investment. Public consumption declined by 0.2%, while private consumption retreated by 10.5% in the quarter. Imports tumbled by 24.6% yoy (also affected by a weaker ARS), while exports increased by a modest 1.7% yoy (with the impact of a good soy harvest to be reflected in 2Q19). All sectors but Agriculture and Livestock deteriorated in 1Q19. Additionally, the unemployment rate rose to 10.1% in 1Q19, from 9.1% in the same quarter of last year. The employment rate fell by 0.1 p.p., to 42.3%, while the participation rate increased to 47% (from 46.7% in 1Q18). 

A challenging international scenario is likely to continue to pressure the economy this year. We recently adjusted our GDP growth forecast for 2019 down to -1.4% (from -1.2%), due to our expectation of weaker global growth and despite an anticipated sequential recovery in 2Q19, led by a good harvest. We note that the risks are still tilted downward, given ongoing adjustments and uncertainties over the outcome of the upcoming presidential election.


Barring the single optimistic turn in March, consumers have held a pessimistic view for eight of the last nine months. The only other periods of such sustained pessimism occurred during the 27-month stint starting in early 2016 and a period near the start of the century. In May, think-tank Fedesarrollo’s consumer sentiment index came in at -5.0% (0 = neutral), a 13.9 p.p. deterioration over twelve months (-9.6% in April). The decline from May 2018 was mainly explained by consumers’ one year outlook (dropping 17.5 p.p. to -4.0%), dragged down by the economic perception (+1% vs. -28.5% one year ago). Meanwhile, the economic conditions sub-index fell 8.4 p.p. to -6.5%, likely impacted by the sustained depreciation of the Colombian peso (4.5%) during the month and the news flow highlighting political deadlock in the country. Going forward, a weak labor market amid elevated global uncertainty would likely prevent a notable confidence recovery and dent the evolution of consumption. We see GDP growth of 2.6% this year, broadly unchanged from last year.

Tomorrow’s Agenda: The central bank will publish the trade balance for the month of April at 12:00 PM. As oil exports improve and import growth slows, we expect a narrowing of the trade deficit to USD 345 million (USD 762 million in March).

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