Itaú BBA - Rate hike expected in Chile this month

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Rate hike expected in Chile this month

January 11, 2019

It would be the second hike in the gradual normalization cycle following the October initiation

Talk of the Day

Our LatAm Macro Monthly report will hit your mailboxes today, featuring scenarios for Brazil, Mexico, Argentina, Chile, Colombia, Peru, the global economy and commodities.


The central bank's monthly analyst survey shows close to 2/3s of analysts expect a 25bp rate hike to 3.0% later this month (January 30). It would be the second hike in the gradual normalization cycle following the October initiation. Thereafter, stable rates are expected for March, while a third hike is seen in June. The end of the cycle (4% in 2 years) remains unchanged from the previous survey (unlike asset prices that have shown fewer hikes given both growing global and domestic growth concerns). Meanwhile, the relevant 2-year inflation expectation remains anchored at the 3% target (hence, rising from the 2.6% in 2018) and the growth outlook for 2019 was steady at 3.6% (our call: 3.5%). Going forward, the board will possibly re-evaluate whether ongoing global trade uncertainties, softening global growth and lower confidence are limiting the growth and inflation outlook enough to alter its trajectory for the policy rate (reaching 4.0%-4.5% in 1H20). We expect four rate hikes this year (to 3.75%), but risks tilt toward a more gradual cycle, given the external scenario.

The Autonomous Fiscal Council (CFA) is only short administrative steps in its path to replace the current Fiscal Advisory Council (created through a ministerial decree in 2013 during the first administration of President Sebastián Piñera). The CFA will be an organization that has both political and operational autonomy and is a key development in building institutional strength and fiscal transparency. The President of the Republic will choose the head of the council among board members, that have been ratified by the Senate. To limit political partisanship, the appointment of members would be staggered. The CFA will have resources to commission studies that are relevant to its mandate. It may request the collaboration of public bodies, and has the ability to call for the information it considers necessary to analyze situations falling within its sphere of competence. Regarding its functions, the CFA will still evaluate and monitor the calculation of the cyclical adjustment of actual income made by the Budget Office. However, the body may now make observations and propose methodological and/or procedural changes for the calculation of the Structural Balance to the Ministry of Finance, unlike the current council that only carries out studies at the request of the Minister of Finance. Additionally, it will regularly report to Congress. Nevertheless, the CFA is a consultative body, so its decisions are not binding.

Macro Scenario: Gradual hiking cycle to continue. November activity data means growth close to 4% in 2018 is likely (after 1.5% in 2017). We expect a deceleration to a still-solid 3.5% pace this year, but persistent headwinds are downside risks – global trade uncertainties, lower copper prices and deteriorating private sentiment. Low inflation readings at the end of 2018 may result in below-target inflation in 2019 due to inertia. Nevertheless, a pickup is likely, given the expected consolidation of activity (narrowing the output gap) and tradable inflation pressure because of the weaker exchange rate. With activity still dynamic at the close of 2018, the central bank will likely feel comfortable to continue with its normalization cycle later this month. Going forward, the board will likely re-evaluate whether ongoing global trade uncertainties, softening global growth and lower confidence are hampering the growth outlook enough to alter its trajectory for the policy rate (reaching 4.0%-4.5% in 1H20).
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Traffic of heavy vehicles  (ABCR) fell 2.1% mom/sa in December (our seasonal adjustment). The index shows a downward trend through 2H18, standing below the levels seen between Feb-Apr (before truckers’ stoppages). In year-over-year terms, traffic of heavy vehicles declined 4.1%. We believe that the relative weakness of the industrial sector is a consequence of two factors: i) lagged effect of tightening financial conditions in previous quarters; and ii) slowing global growth, particularly in countries that are large buyers of Brazil’s manufactured items. Our preliminary forecast for December’s industrial production was lowered to 0.6% mom/sa (-2.7% yoy) from 1.0% mom/sa previously.

Day ahead: December’s IPCA inflation will be released at 9:00 (SP Time). We forecast a 0.20% monthly increase, leading the full-2018 IPCA reading to 3.80% (from 2.95% in 2017). 


Macro Scenario: Responsible fiscal budget, but execution is a risk. AMLO is committed to fiscal responsibility, but implementation of the fiscal targets is challenging, given his social and economic programs and drags on economic activity (U.S. slowdown and uncertainties over domestic policy direction). As expected, the minimum wage increased 16% at the national level and 100% in cities close to the northern border (only in 43 municipalities). Gasoline prices will not be allowed to increase by more than inflation (despite an increase of more than 4% in the excise tax for 2019). We estimate economic activity grew 2.0% in 2018. Looking forward, we expect a GDP slowdown to 1.7% as uncertainty over domestic policy direction affects investment and a deceleration in the U.S. economy curbs exports. We expect one additional interest rate hike (bringing the policy rate to 8.5%) in 1Q19. However, the minutes of the most recent decision do not indicate that board members see the need for further tightening, given the current data.
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Day ahead: The Statistics Institute (INEGI) will publish November’s industrial production at 12:00 PM (SP Time). We expect industrial production to decrease 0.7% yoy (from +1.0% in October).

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