Itaú BBA - Argentina’s central bank cuts reference rate

Latam Talking Points

< Voltar

Argentina’s central bank cuts reference rate

Janeiro 17, 2020

The Argentine central bank cut the Leliq rate to 50% from 52%. This is the fourth rate cut since Fernández took office last month

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

Talk of the Day


The Argentine central bank cut the Leliq rate to 50% from 52%. This is the fourth rate cut since Fernández took office last month. The Leliq rate has fallen 1300 bps since December 2019, supported by tighter exchange rate controls. Interest paid on deposits accompanied the slide down in that period, hitting 36.5% and entering in negative territory in real terms. 


President Piñera will send a pension reform bill to Congress, aiming to address a cornerstone issue behind recent protest action in the country. Despite a myriad of demands raised during the social uprising, a key factor was the low levels of pensions. While Congress responded by increasing the minimum pension (received by 1.6 million Chilean individuals) by 50% for pensioners over 80 years old (and a more gradual rise for other age brackets), a structural reform to the system continued to encounter sharp divisions. The key proposal of the government’s updated plan is to increase pension contributions by 6% (to be paid by the employer, and above the current level of 10%), with 3 p.p. directed to individual accounts, while the remaining 3 p.p. would be paid into a state fund (to improve current and future pensions). An autonomous public institution would administer the extra 6%. The increase would be gradual (0.5 p.p. per year) to limit potential adverse effects on wages and employment. The bill differs from the government’s previous version that implied a 5 p.p. increase, with a 4-1 p.p. split between the individual and the state fund (while the initial proposal was for a 4% increase, all directed to individual accounts). Additionally, the reform would open opportunities for new pension bodies (non-profit making companies etc.) to compete with the private pension funds (AFP) for the management of the current 10% contribution. In an effort to tackle public frustration that pension funds profit despite performance, the bill proposes that, in the case of negative returns, administrators would have to return part of the management fees, alongside other administrative measures. The opposition remains divided, with its most recent proposal having the full 6% increase going to the state fund.

Macro Scenario: Following the social protests that brought the country to a halt in October and November, the government’s response, including its social agenda and clarity on the path to a potential constitutional reform, has led the protests to lose momentum and diluted the operational disruptions at the start of 2020. The risk of an intensification of the protests in coming months and still despondent confidence will nonetheless continue to affect internal demand, making a meaningful recovery of activity unlikely this year (1.2% for 2020, from 1.0% expected for 2019). With the CLP recovering from historical lows following an aggressive intervention program by the central bank, and a more upbeat global outlook, inflationary pressures may be more contained than expected by the monetary authority, supporting our view that the central bank will increase monetary stimulus later this year (with an additional 50-bp easing to 1.25%). ** Full story here.


The Central Bank's activity index (IBC-Br) advanced 0.18% mom/sa in November, above our call and the market consensus (Itaú: -0.3%; mkt:-0.05%), leading the year-over-year growth rate to 1.1%. Still on the activity front, our Itaú Unibanco monthly GDP dropped 0.3% mom/sa in November, interrupting four consecutive monthly gains and slowing the year-over-year growth rate to 0.9%. In our view, economic activity remains in a gradual acceleration trend, but with some weaker signs at the margin in November and December. Our preliminary forecast for 4Q19’s GDP points to a 0.5% qoq/sa increase. ** Full story here.


Think-tank Fedesarrollo’s consumer confidence index closed 2019 entrenched in pessimistic ground, at -9.5% (0 = neutral), below the -8.3% recorded one year earlier (-14.4% in November). Consumer have held a downbeat outlook during 15 of the last 16 months. The 1.2 p.p. deterioration from 2018 was led by deteriorating economic conditions (-12.2% vs. -4.1% in December 2018), as households felt economically worse-off. Meanwhile, expectations improved, but remained in negative territory (-7.7% compared to -11.1% one year earlier). Solid consumption remains at odds with labor market developments and low confidence, raising doubts about its sustainability. We expect growth of 3.1% this year (from 3.3% expected in 2019), with an improved global outlook offsetting possible domestic risks linked to social unrest.

Day Ahead: At 12:00 PM, economic activity indicators for the month of November will be released. Still low confidence levels and the social demonstrations registered in the month could hamper economic activity. We expect retail sales to slow to 3.0% yoy (from 7.4% yoy in October), while our call for manufacturing is a 0.2% yoy decline (from 2.1% yoy).


Macro Scenario: AMLO announced a minimum wage hike of 20% at the national level, excluding the northern border. Benefits for economic activity from the minimum wage hike will probably be limited, while risks for inflation increase. Inflation closed 2019 below Banxico’s target of 3%, but a temporary rebound (due to an unfavorable base effect and excise tax update) is expected during the first two months of the year. We expect economic activity to contract 0.1% in 2019 and recover gradually to 1.1% in 2020. On monetary policy, we expect Banxico’s reference rate to reach a level of 6.00% by the end of 2020, with the first 25-bp rate cut of the year in the February meeting. While activity weakness, well-behaved currency and low level of headline inflation support gradual rate reductions, persistence in core inflation and inflationary risks associated with domestic policies, such as the mentioned minimum wage hike, stand in the way of a bolder policy response and will probably lead the central bank to intercalate the cycle with pauses. ** Full story here.

< Voltar