Itaú BBA - Evening Edition – Start of normalization cycle delayed in Colombia

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Evening Edition – Start of normalization cycle delayed in Colombia

February 18, 2019

A still-incipient activity recovery, risky global scenario and better-behaved inflation suggest there is no need for rate hikes in the near term

Talk of the Day
 

Colombia

According to the central bank’s monthly survey, inflation expectations remain close to the 3% target. Inflation is seen ending 2019 at 3.41% (in line with our call), still an increase from the 3.18% in 2018, but ticking down from the 3.47% expected in January. The 1-year horizon inflation outlook dropped to 3.34% (3.42% in January), while the 2-year horizon inflation expectation moved to 3.10% (3.15% previously). Expectations for core inflation measures (excluding food prices) increased from 3.20% to 3.25% for the 1-year horizon, while remained stable at 3.09% for the 2-year horizon. The central bank general manager has recently stated that inflation expectations are elevated, representing a risk to the expected inflation convergence. The central bank expects inflation to be closer to the 3% target this year. Meanwhile, analysts now see the normalization cycle to start later with the first hike expected in June (previously April), while a second hike to 4.75% is now expected for October (last month respondents were split between a rate hike in July and August). We believe that the central bank will maintain its holding pattern for the time being and begin a modest hiking cycle only in 2H19. A still-incipient activity recovery, risky global scenario and better-behaved inflation suggest there is no need for rate hikes in the near term. The next monetary policy meeting will be held on March 29.

Tomorrow’s agenda: Think-tank Fedesarrollo will release its consumer confidence index for January. In December, the indicator partially recovered from the sharp drop into pessimistic ground in the previosu month, as the eventual tax reform was not as harsh on consumers as initially thought. Nevertheless, consumers remained downbeat at -8.3%, (0 = neutral), compared to the -19.6% in November (the lowest level since March 2017). Going forward, stable inflation and mildly expansionary monetary policy would likely support private confidence, aiding the continuance of a consumption recovery. 

Brazil

According to the central bank’s survey with market participants (Focus), the median of GDP growth expectations oscillated to 2.48% for this year (from 2.50%), but increased to 2.58% for 2020 (from 2.50%), and remained stable at 2.50% for 2021. The IPCA inflation expectations remained flat at 3.87% for 2019, 4.00% for 2020 and at 3.75% for 2021. The year-end Selic rate expectations also remained flat at 6.50% for 2019 and at 8.0% for both 2020 and 2021. The median of the forecasts for the exchange rate did not change for the three years horizon (2019-2021): BRL 3.70/USD for 2019; BRL 3.75/USD for 2020; and BRL 3.80/USD for 2021.

Fixed Income Strategy

Trade talks between U.S. and China will continue this week in D.C. Further progress towards a trade deal, coupled with a gradual deceleration in the U.S. and signs of stabilization in China’s growth, may have a positive impact on EM asset prices.

Local rates in LatAm were broadly stable last week, except in Brazil where rates tightened significantly. Chilean rates widened 2bps at the front-end, while Colombia’s rates declined by the same amount, benefiting our trade paid at the 1-year local rate in Chile and received at the 1-year local rate in Colombia, now with a 7bps gain (see trade idea).We are maintaining the position, as we believe the spread between Colombia and Chile’s 1-year rates may continue declining ahead.
** Full story
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