Itaú BBA - Evening Edition - Selic rate to remain at 6.5% pa for a while

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Evening Edition - Selic rate to remain at 6.5% pa for a while

December 18, 2018

The Copom also discussed the recent drop in inflation forecasts and assessed the level of underlying inflation measures

Talk of the Day


The Copom minutes surprised by reintroducing the assessment of an asymmetric balance of risks, with upside inflation risks prevailing, even if recognizing these are less intense than previously thought. The Copom also discussed the recent drop in inflation forecasts and assessed the level of underlying inflation measures, concluding that the projections are still consistent with the convergence of inflation towards its targets in 2019 and 2020. All in all, this reinforces the outlook that the Selic rate will hibernate at the current level of 6.5% pa for quite some time, barring any significant shocks. We expect policy normalization will only begin sometime in 2020.   ** Full story here.


Higher imports led to a wider trade balance deficit in October, partly due to transitory factors. The trade deficit came in at USD 1.2 billion in October, in line with market expectations, but larger than the USD 489 million deficit recorded one year ago. The rolling 12-month trade deficit widened to USD 5.8 billion, from USD 5.0 billion as of June (USD 6.1 billion in 2017). The recent widening is explained by the non-energy deficit rising faster than the energy surplus improvement. Meanwhile, our seasonally adjusted series shows that the trade balance deficit in the quarter increased to USD 6.7 billion (annualized), from USD 5.4 billion in 3Q18 (USD 8.0 billion in 2Q18).   ** Full story here.

Amid an outlook of lower oil prices in the horizon, a slow current-account correction is likely. We see the 2018 current account deficit coming in at 3.2% of GDP, broadly stable from the 3.3% deficit recorded last year, narrowing to 3.0% next year.


Unemployment rate increased to 9.0% in 3Q18 from 8.3% in 3Q17 according to the INDEC (the official statistical agency). The figure was lower than market expectations, according to Bloomberg survey (9.8%). The employment rate rose to 42.5% from 42.4% in the same quarter one year ago, while the participation rate increased to 46.7% in 3Q18 from 46.3% in 3Q17. Across regions, the highest unemployment rate was registered in the greater Buenos Aires (10.5%) which explains 56% of the work force.  We expect the labor market to show a deterioration this year, in line with the contraction in economic activity. We expect the unemployment rate to rose to an average 9% this year from 8.3% in 2017.

Tomorrow’s agenda: The trade balance for November will come out on Wednesday. A weak currency and contraction of internal demand led to trade surpluses in the previous months. For November, we forecast a surplus of USD 150 million (up from a USD 1.5 billion deficit registered in the same month of 2017), due to a significant drop in imports, more than offsetting weak exports. If our forecast is correct, the rolling 12-month trade deficit will fall to USD 6.8 billion from USD 8.5 billion in October. 


Tomorrow’s agenda: The central bank will publish the minutes of the December monetary policy meeting, at which the board unanimously decided to keep the policy rate steady at 2.75%. We anticipate there will be limited new information in the minutes, considering the publication of the flagship Inflation Report the day following the decision. The report outlined the baseline trajectory for the policy rate: gradual normalization to neutral levels (4%-4.5%) in 1H20. With the activity recovery remaining in check, short-term inflation expectations lowered on the back of weaker global oil prices, but still seen anchored in the relevant 2-year horizon.


Tomorrow’s agenda: The statistics institute (INEGI) will publish Q3’s aggregate supply, which we estimate a 5.5% yoy growth (from 3.9% in the 2Q18). We already know that real GDP expanded 2.5% yoy in 3Q18. Moreover, based on balance of payments data, we estimate that real imports of goods and services expanded 9.0% yoy in the 3Q18.

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