Itaú BBA - Evening Edition – Data reaffirm low inflationary pressure in Chile

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Evening Edition – Data reaffirm low inflationary pressure in Chile

March 8, 2019

The inflation rates will likely remain low this year

Talk of the Day


Inflation came below expectations in February. Following the basket changes from 2018, the second data point utilizing the new CPI basket reaffirmed low inflationary pressure and supporting caution at the central bank. Consumer prices were flat from January to February (+0.1% one year ago), inferior to the market consensus of 0.1% (also our call). As a result, annual variation ticked down 0.1pp to 1.7%, further below the central bank’s 2%-4% range around the 3% target. The drop was led by tradable inflation on the back of lower fuel prices, while non-tradable inflation edged up from 2.9% to the 3% target. Overall, inflationary pressures are subdued and in line with a slower than expected convergence to the central bank’s target, hence, stable rates for the time being is likely.

The inflation rates will likely remain low this year. Although we see some pickup as the year unfolds (due to normalization of tradable inflation, and rising output-gap sensitive measures), the results of the methodological changes have led us to revise our yearend call to 2.6% (3.0% previously). Leading up to this data point, the message from the central bank, particularly governor Mario Marcel, has been that short-term inflation expectations have dropped following the introduction of the new methodology last month, but the 3% medium-term outlook remains broadly unchanged. Hence, we expect the upcoming Inflation Report by the central bank to emphasize that the probability of rate moves in the short-term is low.
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The Central Bank of Peru (BCRP) decided to keep the reference rate at 2.75% in March, in line with both our and market expectations. The board expects annual inflation around the 2% central bank target. As in previous communication, the BCRP believes that it is appropriate to maintain an expansionary monetary policy as long as inflation expectations remain anchored in a context of below-potential economic activity growth.

We expect the BCRP to deliver two 25-bp rate hikes this year. However, given weaker growth in the core economies, the more accommodative stance of the Fed and well-behaved inflation, we think the central bank can afford to wait before removing its stimulus until it has more clarity on the economic outlook. Therefore, we do not expect rate hikes during the first half of this year.
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Week Ahead: On Tuesday, the statistics institute (INEI) will publish January’s trade balance. We forecast a USD 0.8 billion surplus. Ending the week, the statistics institute (INEI) will announce January’s GDP proxy. We estimate that the GDP proxy expanded 2.3% yoy, from 4.7% in December.


Gross fixed investment (GFI) fell in 4Q18. The monthly GFI indicator decreased 6.8% yoy, below our forecast of -5.4% and market expectations (-4.9%). According to calendar adjusted figures, GFI decreased at a similar rate (-6.5% yoy, from -2.8% in November), taking the 4Q18 growth rate to -2.5% yoy (from 0.6% in 3Q18). 

At the margin, GFI fell sharply. With seasonally adjusted figures, GFI decreased 0.7% mom in December (from -3.5% in November), taking the qoq seasonally adjusted annualized rate (qoq/saar) to -12.5% in the 4Q18 (from -3.7% in 3Q18).

On another note, private consumption also decelerated in the last quarter of 2018. The monthly proxy for private consumption decelerated to 0.4% yoy in December (from 2.2% in November). The results could have been influenced by gasoline shortages (started the last week of December in some states of Mexico), which in turn is reflected in private consumption indicator directly due to lower gasoline sales and indirectly as access to stores become more difficult. Moreover, the result is consistent with the weak monthly GDP proxy from December (0.04% yoy, from 1.8% in November), in particular the services index, which posted a growth rate of 1.0% yoy in December (from 3.1% in November). Using calendar-adjusted data reported by the Nation Statistics Institute (INEGI), private consumption decelerated to 0.7% yoy in the December (from 2.1% in November), taking the 4Q18 growth rate to 1.4% (from 2.6% in the 3Q18).

We expect economic activity to slow down in 2019 relative to 2018 (growth of 2.0%). Uncertainty over domestic policy direction and remaining uncertainties over the approval of NAFTA by the U.S. Congress will continue to weight on investment. Deceleration in the U.S. economy will also curb growth. In turn, we expect private consumption growth rate moderate its pace in 2019 (relative to 2018) as employment is already moderating. Moreover, in the short term (January and February) we expect activity to be affected by one-off factors (gasoline shortages) and strikes in some manufacturing firms.
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Week Ahead: On Wednesday, the Statistics Institute (INEGI) will publish January’s industrial production. We estimate industrial production decreased 2.0% yoy (from -2.6% in December). 


Week Ahead: Anfavea’s auto production for February will be released on Monday. February’s IPCA inflation will be released on Tuesday, for which we forecast a 0.42% monthly increase, leading the 12-month reading to 3.88% (from 3.78% in January). On economic activity, industrial production (PIM) will come out on Wednesday, for which we forecast a slight decline of 0.1% mom/sa (-1.2% yoy). For retail sales (PMC) (Thursday), our forecast points to a 0.4% mom/sa gain on both core and broad sales (which includes vehicle sales and construction material). On Friday, service sector volume will be released, for which we forecast a 2.4% yoy increase. Finally, two other indicators related to February’s industrial production will likely be released (without a specified date): paper cardboard dispatches (ABPO) and traffic of heavy vehicles (ABCR).


Week Ahead: On Thursday, the INDEC (the official statistical agency) will publish the National CPI for February 2019. The consulting firm Elypsis, which tracks consumer prices, has projected a new sequential acceleration in headline inflation for February (4.0% mom). If the Elypsis forecast is correct, annual inflation would have reached 51.6% in February 2019. On Friday, the treasury will publish the federal fiscal accounts for February 2019. We estimated that the 12-month rolling primary deficit as of January totaled 2.6% of GDP, down from the 2.7% in December 2018. 


Week Ahead: On Thursday, activity indicators for the month of January will be published. For January, we expect industrial production to improve to 1.5% yoy, as confidence bounced back, while retail sales growth is likely to moderate to 4.0% in twelve months, as auto sales become a drag and a higher base of comparison is met.

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