Itaú BBA - Low rates for longer in Chile

Latam Talking Points

< Back

Low rates for longer in Chile

April 2, 2019

Chilean central bank is following the global liquidity tide, while also reacting to domestic issues that reflect a slower inflation convergence to the 3% target

Talk of the Day

Chile

Following on from Friday’s decision to keep the policy rate stable, the central bank’s flagship inflation report (IPoM) sees a significantly more gradual normalization process. The policy rate is likely to be kept unchanged at 3.0% for at least the next two quarters, while neutral levels (4%-4.5%) are expected to be reached towards the end of the policy horizon (up to 24 months, around 1H21). In the previous report, the central bank saw the policy rate reaching neutral by the first half of 2020. Additionally, the board announced the 2Q IPoM (June) will include revisions to the neutral rate and potential GDP growth. We believe the likelihood of neutral rate estimates being lowered (from the current range of 1%-1.5% in real terms) is not negligible. Overall, the Chilean central bank is following the global liquidity tide, while also reacting to domestic developments that reflect a slower inflation convergence to the 3% target, hence justifying the retention of the monetary stimulus for longer than previously anticipated.

Regarding forecasts, disappointing mining production resulted in the growth forecast range for this year being shaved by 25bps to 3%-4% (4% in 2018). Meanwhile, the forecast range for next year was raised by 25bps to 3%-4%, expected to benefit from supply shocks (the absorption of immigrants in the labor market). Meanwhile, the 2021 growth outlook was published for the first time (2.75%-3.75%), around our calculation of potential. Overall, the output gap is seen to be larger than previously estimated, as migrant inflow likely led to higher short-term potential GDP.
** Full story
here.

Day Ahead: At 9:00 AM, February’s retail sales will come out. Still low consumer sentiment and falling new car sales point to retail sales growth of 0.8% yoy. 

Brazil

The trade surplus in March reached $5.0 billion, somewhat below our forecast ($5.6 billion) and market consensus ($5.4 billion), as exports weakened at the margin. The surplus over 12 months receded to $57 billion from $58 billion, while the seasonally-adjusted annualized quarterly moving average slid to $57 billion from $68 billion in February. Altogether, March figures point to a decline in the trade balance, led by weaker exports. Nevertheless, the trade surplus remains at a high level. We expect the 2019 trade surplus to virtually match last year's reading, with increased exports and imports.
**Full story
here.

The BCB released its weekly market participants survey (Focus), with no major changes. According to the survey, the median forecasts for GDP growth for 2019 barely receded, to 1.98% (from 2.00%) and, for 2020, to 2.75% (from 2.78%). For 2021, growth expectations remained stable at 2.50%. The median of IPCA inflation forecasts for 2019 remained at the comfortable 3.89% level. Inflations expectations for 2020 (4.00%) and 2021 (3.75%) also did not change, and are in line with the BCB’s inflation targets for the respective horizons. The year-end Selic rate did not change for the three years horizon (2019-2021): at 6.50% for 2019, 7.50% for 2020 and 8.00% for 2021. The median of the forecasts for the exchange rate also remained flat for the three years horizon (2019-2021): at BRL 3.70/USD for 2019; at BRL 3.75/USD for 2020; at BRL 3.80/USD for 2021.

Day Ahead: At 9:00 AM, February’s industrial production will be released. We forecast a 1.6% gain on a seasonally adjusted monthly basis, after a 0.8% drop in January.

Colombia

In the minutes of the March monetary policy meeting, the board appears positive overall about the economic outlook despite the continued deterioration of the global scenario. The minutes retained a neutral tone, likely signaling there is no rush to move rates in the near term. Hence, we continue to expect only one rate hike to 4.5% near the close of the year. The board welcomed the evolution of inflation as all inflation measures are behaving better than expected, reaffirming its 3.0% (the target) yearend expectation. The board sees limited upside risks coming from the El Niño weather phenomenon, exchange rate depreciation or effects from minimum wage revisions. Additionally, the output gap is seen closing faster than expected. For 1Q19, the technical staff is expecting growth at 3.2%, close to the economy ’s potential, led by dynamic internal demand. Accordingly, growth of 3.5% for this year is now expected (upgraded from 3.4%; Itaú: 3,3%). However, the current account deficit is seen widening but to be fully funded. The technical staff estimates the current account deficit to come in between 3.9% and 4.7% of GDP this year, with 4.3% as the most likely scenario (revised from 3.9% previously; Itaú 4.0%). 

We believe that the central bank will remain on hold for the time being and move closer to neutral rates only later this year.The only-gradual activity recovery and well-behaved inflation suggest there is no need for rate hikes in the near term amid a still sluggish global economy and a looser monetary policy stance by core central banks.
**Full story
here.

Peru

Headline and core inflation accelerated in March, driven by seasonality effects from vegetables and legumes and education services. March’s CPI posted a month-over-month rate of 0.73% (from 0.49% a year ago), above our forecast of 0.66% and median market expectations of 0.58%. Annual headline inflation reached 2.25% in March (from 2.00% in February). At the margin, headline and core inflation also accelerated. We forecast annual headline inflation of 2.6% by the end of 2019, supported by a recovery of domestic demand. In particular, core inflation (excluding energy and food items) seems to be accelerating gradually, reflecting the state of the economy.
** Full story
here.



< Back