Itaú BBA - Banxico cuts reference rate by 50bps in extraordinary meeting

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Banxico cuts reference rate by 50bps in extraordinary meeting

Abril 22, 2020

We expect Banxico to continue easing its monetary policy stance, reaching a rate of 4.50% before the end of 2020

Talk of the Day
 

Mexico

In an extraordinary meeting, Banco de Mexico (Banxico) cut its policy rate unanimously by 50-bp (bringing it to 6.00%). Banxico cut its policy rate despite the recent rating downgrades to PEMEX (rated now by two out of three rating agencies as junk), a risk noted in the past monetary statements. We also note Javier Guzman, a hawkish Board member which had a dissident vote in the last monetary decision (voted for 25-bp cut, while the rest of the members voted for a 50-bp cut) was now on board for a more significant rate cut.

The balance of risks for economic activity is significantly biased to the downside. Banxico estimates preliminary an annual contraction in economic activity of more than 5% during the first half of the year due to the outbreak. While the Board is still cautious over the balance of risks for inflation as uncertainty has increased meaningfully, the Board expects inflation to converge to Banxico’s target. The widening of slack conditions and lower energy prices (in the short-term) should put downward pressure to inflation. However, the depreciation of the exchange rate (depending on the magnitude and persistence) could pressure inflation to the upside. Still, the Board expects inflation to converge to Banxico’s target (in the last statement the Board expected a slower convergence).

We expect Banxico to continue easing its monetary policy stance, reaching a rate of 4.50% before the end of 2020. In all, the Board seems more convinced of the need of lower rates amid the widening of slack conditions and lower inflation, reducing upside risks to our policy rate forecast. At the same time, the decision to cut the policy rate by 50-bps indicate Banxico is not willing to adopt a significantly looser policy stance than the one we are expecting.

Colombia

The trade balance in February came in at a USD 756 million deficit, in line with our call and the Bloomberg market consensus (USD 730 million), while somewhat larger than the USD 582 million deficit recorded last year. As a result, the rolling 12-month trade deficit sits at USD 10.6 billion (edging down from USD 10.8 billion in 2019, but still significantly wider than the USD 7.0 billion in 2018). Our own seasonal adjustment also shows the deficit ticking down in the quarter (to USD 9.5 billion, annualized, from USD 11.6 billion in 4Q19), as exports posted some recovery. In coming months, the evolvement of external imbalances will depend on the relative strength of the slump in exports, given lower oil prices and weaker external demand, and the halt in import demand due to the lockdown of the Colombian economy.  While deteriorating terms-of-trade and slowing global activity means Colombia’s external account imbalances would persist, we expect some narrowing of the current account deficit from the 4.3% of GDP recorded last year to 3.7%.

Brazil

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 43,079 confirmed cases (up by 2,498, vs 1,927 yesterday), with 2,741 confirmed deaths (up by 166, vs 113 yesterday).



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