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At the June Monetary Policy Meeting, the Board of the Central Bank of Chile (BCCh) decided to cut the monetary policy rate by 25bps to 5.75%, in line with market consensus and our call.
2024/06/19


Talk of the Day

Chile

 

At the June Monetary Policy Meeting, the Board of the Central Bank of Chile (BCCh) decided to cut the monetary policy rate by 25bps to 5.75%, in line with market consensus and our call. The Board was split, with Stephanie Griffith-Jones favoring another 50bps cut. The last divided decision was in January (again arguing for a larger cut). The communique signals that the central scenario of the BCCh considers further easing ahead, but that the bulk of the adjustment has now unfolded. The guidance suggests the end of the cycle is closer and opens the door to pauses ahead. The 25bps cut is a further moderation from the pace in the three prior meetings this year (100, 75, 50bps). With yesterday’s decision, the BCCh has reduced the policy rate by a total of 550bps from the cycle maximum of 11.25% in July 2023. The real ex-ante one-year rate, obtained by discounting the one-year inflation expectation according to the analyst survey, fell to 2.55% after the decision, still above the real neutral range (0.5% - 1.5%). A scenario of higher inflationary pressures and improved domestic activity will add a layer of policy caution but not halt the cutting cycle. The cost-push nature of the relevant upward revision expected to the BCCh inflation forecasts is unlikely to de-anchor inflation expectations at the two-year policy horizon . However, the persistence of higher copper prices may lead to an improved investment outlook that may raise demand-side inflationary pressures. In sum, the scenario favors a cautious approach as rates near the nominal neutral range (3.5% - 4.5%). Developments on the global financial conditions will also play a key role in determining the end point of the current cycle. The 1Q24 IPoM showed a corridor path (33% confidence interval) that averaged 5% in 4Q24 and 4% in 4Q25. We expect the path to neutral to be even slower. Our current scenario sees rates pausing at 5.25% this year before resuming a downward trend to 4.5% during 2025.  The BCCh will publish the June IPoM today and minutes on July 4. The next monetary policy meeting will be on July 31. **Full story here.

 

Electricity increases to start materializing in June, earlier than we expected. In the context of significant uncertainty regarding the timing and magnitude of expected electricity price adjustments, increases to the distribution component of the bill seems to have materialized earlier than we expected. Surveys of online prices suggest the distribution component rose (of between 6 and 11%; prior expectation was August along with a smaller increase), thus posing upside pressures to our June monthly CPI call. Of note, the National Statistics Institute (INE) constructs standard accounts for the calculation of electricity with the rates delivered by the distributors with a cut-off date for valuing the services is the 15th of each month, but the window to receive the information is until the 20th of each month. So, we will incorporate a distribution-led electricity increase of around 8% in June, adding 18bps to our prior call (-0.23%) to reach -0.05%. Falling gasoline prices and the effect of retail sale promotions should keep downside pressure on the monthly inflation print in June. The first-generation price adjustment is still seen unfolding in July (12-15%), while the transmission increase remains likely during 2H24. We expect the central bank to incorporate the electricity price pressures into its updated forecasts (IPoM, June 19), taking the headline CPI from 3.8% for this year to the high-end of 4%. Continued electricity pressure for 2025 and heightened indexation pressures will likely see the policy rate corridor shifted upwards as a more cautious path is undertaken to reach neutral (4%).

 

Day Ahead: the BCCh will publish the 2Q24 Monetary Policy Report (IPoM).

 

Brazil

 

Day Ahead: The Brazilian Central Bank’s Monetary Policy Committee (Copom) will meet today, after weeks of intense volatility in the markets – fueled, along with other reasons, by the dissent in the previous decision. The BRL reached its weakest levels of 2024, decoupling from peer currencies. Our broad measure of country risk – which is based on asset prices and their relative performance – went up again after reaching post-pandemic lows earlier this year. It’s reasonable to state that the domestic uncertainties mentioned in the committee’s lates t communications remain elevated and might even have increased, particularly with regard to the perception of the risks of changes to the main parameters of the fiscal framework approved last year. On the data evolution side, despite recent releases of inflation with a benign composition, the breakdown of May’s IPCA showed that core services inflation accelerated again at the margin. In addition, inflation expectations reported in the Focus survey rose significantly. Economic activity remains resilient, with robust GDP and labor market figures standing out. Under these conditions (especially the deterioration in expectations), even if exchange-rate performance improves, we see that the committee will unanimously decide to maintain the current interest rate level of 10.50% pa at its next meeting. Read our in-depth Copom Cockpit report here.

 

The Datafolha institute released a new poll on the President’s popularity. According to the survey, the President's approval rating has ticked up slightly to 36% (good + great), compared with 35% in the previous Datafolha poll published in March of this year. Moreover, the rejection rate (bad + terrible) has reached 31%, from 33% in the previous survey. Meanwhile, 31% consider Lula’s government regular, from 30% in March’s poll.

 

Mexico

 

Aggregate supply and demand grew 2.6% yoy in 1Q24, above market consensus of 2.2%. At the margin aggregate supply registered a solid expansion of 1.5% qoq/sa, explained by strong real imports of goods & services (4.1%) which more than offset a weak GDP growth figure of 0.3%. Domestic demand was also strong (1.2% qoq/sa) driven by private consumption (1.5%), while gross fixed investment rose by 0.8%. Resilience in private consumption is likely associated to bringing forward transfers from social programs into 1Q24 from 2Q24 as they were forbidden by law in the electoral period. Finally, exports of goods & services were practically flat sequentially in 1Q24, likely limited by a strong real exchange rate in the period, despite a resilient external demand.

 

We expect domestic demand to soften during the 2H24 as fiscal expenditure slows after elections and amid the transition of administrations. We could see some recovery in the manufacturing sector (reflected in exports of goods & services) during the rest of the year supported by the recent weakening of the currency, associated to the uncertainty from the policy direction of the new administration. Our GDP growth forecast for 2024 stands at 2.3%. **Full story here .

 

Colombia

 

Activity unexpectedly rose sequentially in April. Activity increased 5.5% YoY, up from -1.47% YoY in March but boosted by calendar effects. The 5.5% annual rise was above the market consensus forecast of 2.5% and our call of +1.4%. Once adjusted for seasonal and calendar effects, activity increased by 3.95% YoY (+0.11% previously). The coincident activity indicator (ISE) expanded 2.0% from March to April (SA, partly unwinding the surprising -0.9% in March). Activity was supported by public administration, agriculture and financial services, while dragged by utilities and retail sales. For the quarter ending in April, activity increased 2.0% YoY (+0.7% in 1Q24).  At the margin, activity increased 3.2% qoq/saar (+5.8% in 1Q24). Overall, activity sits 9.9% above pre-pandemic levels.  Our take: Positive activity surprises driven by the primary sector and services are supporting a smoother adjustment at the beginning of the second quarter. However, the activity recovery seems still fragile amid the lagged effect of a tight monetary policy, along with still high inflation and weak consumer and business confidence. We expect the economy to grow 1.2% in 2024 (+0.6% last year), before rebounding to 2.6% in 2025.

 

Analysts still see the policy rate at 8.5% by yearend, as medium-term inflation expectations remain above target. BanRep's monthly analyst survey brought mixed messages on inflation. While 2024 year-end inflation expectations rose by 7pbs to 5.7% (Itaú: 5.2%), the one-year inflation expectation dropped by 28bps to 4.30%, as the two-year inflation expectations declined slightly by 5bps to 3.45% (3% target). Thus, the one-year real ex-ante policy rate stands at 7.45% (7.17% previously), well above BanRep’s neutral rate estimate of 2.4%. On the monetary policy front, analysts continue to expect a 50bp cut at the June meeting, and a year-end rate of 8.5% (stable from the previous survey). However, the 2025 year-end policy rate expectation increased by 25bps to 5.75%. We expect the board to maintain the 50bp pace of cuts in the near term. The next monetary policy meeting will take place on June 28.

 

Argentina

 

Large fiscal surplus in May. Argentina’s treasury ran another primary surplus in May, reaching ARS 2232.2 billion, significantly above the deficit of ARS 247.7 billion posted one year earlier. The nominal fiscal balance stood at ARS 1183.6 billion, also printing positive after a deficit of ARS 631.1 billion in the same month one year ago. As a result, the primary balance during the first five months of the year reached 1.0% of GDP, while the nominal balance stood at 0.4% of GDP.  Based on these figures, we estimate a consolidated nominal deficit of around 1.5% of GDP year to date (including net interest payments from the central bank), narrowing from 4.3% in the same period of 2023. Our fiscal primary balance forecast stands at +0.5% of GDP for 2024 (still below the primary surplus of 1.7% of GDP in 2024 agreed with the IMF). However, if finally, the Lower Chamber approves the fiscal package without the Senate’s changes, we estimate additional tax revenues of ~0.5% of GDP for this year. The solid budget surplus registered in May also adds upward bias for our fiscal forecasts.

 

Day Ahead: the trade balance for May will come out. We forecast a USD 2 billion surplus for that month (from a deficit of USD 1.1 billion registered in May 2023), mostly due to the recovery of the agricultural exports after a severe drought last year.