Itaú BBA - Further hikes can’t be taken for granted in Mexico

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Further hikes can’t be taken for granted in Mexico

January 4, 2019

We still expect one additional interest rate hike (bringing the policy rate to 8.5%) in 1Q19

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The central bank of Mexico (Banxico) published the minutes of December's meeting, held two weeks ago, when the board unanimously increased the reference rate by 25 bps, to 8.25%, retaining a hawkish tone. Among the factors that the board took into account for the decision was the sticky evolution of core inflation. Most board members mentioned that non-core inflation continues at high levels, affecting headline inflation and pressuring the core component. These members also mentioned that short-term inflation expectations increased and highlighted an uncomfortable evolution of inflation risk premium. 

Board members kept the doors open for further rate increases, while rate cuts are not on the table anytime soon. However, the minutes do not suggest that any of the four board members that took part in the decision has – with current information - the mind set on hiking again. This view is consistent with the fact (already revealed in the statement) that no board member voted for a rate hike larger than 25 bps (contrasting with the previous meeting, when one board member voted for a 50-bp rate increase). 

Most members see the budget presented by the new administration as responsible, but with risks of a higher-than-targeted deficit. As in the statement, most board members said that the 2019 Budget was responsible and that it was elaborated with reasonable macro estimates. However, they mentioned that lower economic growth (due to a deceleration in global growth) and oil production are downside risks for revenue estimates. 

Amid high volatility, we still expect one additional interest rate hike (bringing the policy rate to 8.5%) in 1Q19 (there are two policy meetings in the current quarter). While the minutes suggest further tightening is not a done deal, future decisions will be contingent on the domestic political front, inflation data, monetary policy tightening in the U.S., and remaining uncertainties over the approval in the U.S. congress of the renegotiated NAFTA.
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The Argentine central bank met the monetary base target for December. The monetary authority reported that the average monetary base grew 6.3% mom in December (to ARS 1,337 billion). The monetary base level was below the target set for that month in the IMF agreement (ARS 1,351 billion, or  6.3% growth over the November level).  In this way, the central bank preserved almost all the overachievement of the monetary-base targets for October and November (zero growth of the monetary base from the average September level). The December monetary base level was slightly above the tighter target sought by the central bank (ARS 1,335 billion) in its latest Copom meeting. 

The growth targets for the monetary base are zero for 1H19 and 1% per month for 2H19. The central bank ratified the targets and noted that higher growth rates are projected for June and December to meet the seasonal increase in money demand.

The central bank expressed confidence in the disinflation process and recovery in the demand for Argentine pesos. Inflation and expected inflation declined in November. This trend is expected to continue in December. Headline inflation came down to 3.2% mom in November from 5.4% in October and 6.5% in September. Core inflation also fell, but less than expected given the stability of the exchange market. The November reading fell to 3.3% mom, from 4.5% and 7.7% in October and September, respectively. According to private estimates (Elypsis consulting), headline and core inflation will show a new deceleration in December (to 2.3% and 2.4%, respectively). The average expected inflation for the next twelve months fell to 29% in the November central bank survey, from 32.1% in the previous month.

The central bank will keep a tight monetary policy stance. In the statement, the monetary authority said it plans to overachieve the monetary base targets in 1Q19 and to be cautious with potential interventions if the exchange rate is outside the non-intervention area. The upper and lower bounds will be adjusted in 1Q19 at a pace of 2% per month (slightly below the average expected inflation for the quarter and down from the 3% set for 4Q18). In particular, the central bank decided to keep the maximum daily intervention at USD 50 million per day (in the case of purchases) despite the agreement with the IMF, which permits purchases up to USD 150 million. That limit (USD 150 million) will be respected in the case of dollar sales due to a peso weaker than the upper bound.


Jair Bolsonaro gave his first interview to a public television channel (SBT) yesterday. The newly sworn-in president defended a pension reform similar to the proposal currently in Congress, with minor changes. The main highlights are the proposal of a 1-year increase in the minimum age required to retirement every 2 years (adding to a 2-year increase in Bolsonaro’s 4-year mandate), and the possibility of reassessing this limit in the beginning of each new president’s mandate.

According to Fenabrave, vehicle sales reached 234.6k in December, declining 1.6% mom/sa according to our seasonal adjustment (and following a 7.6% decline in the previous month). In yoy terms, sales increased 10.3%, slowing down from November (13.1%). The breakdown shows a 1.5% decrease in passenger cars and light vehicles, and a 4.2% decline in trucks and buses. Our forecast for December auto production (Anfavea, to be released Jan 8th) is 190k (-11.3% yoy, -1.5% mom/sa).


Exports grew 7.9% yoy in November (our call: 11.5%), slowing from 15.2% in October, despite oil exports picking up. Oil exports increased 34.5% (25.0% in October) boosted by higher quantum and prices. Meanwhile, coal exports were the principal drag in the month falling 9.8% (+30.1% previously) due to a notable slowdown in quantum. Coffee exports also dropped 3.1% yoy, completing three months of contractions (-11.2% previously). In the quarter ending in November, total exports rose 9.1%, slowing down from 12.0% in 3Q18 as oil exports moderated to 38.1% from 51.4% in 3Q18. At the margin, exports accelerated to 4.7% qoq/saar, from 2.6% in 3Q18, boosted by oil exports. We see the 2018 current account deficit coming in at 3.2% of GDP, broadly stable from the previous year. A slow current-account correction ahead is likely given an unfavorable oil price outlook.

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