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Central bank minutes show that additional stimulus is likely in Chile

Maio 25, 2020

We expect the board to announce additional support measures in coming weeks

Talk of the Day


The central bank published the minutes of the monetary policy meeting from early May. The text shows agreement amongst the board that the global economic outlook was worsening (compared to the assessment in the March Inflation Report), as there was greater uncertainty about the form, speed and results of the removal of the sanitary control measures both domestically and abroad. All board members highlighted an increase in credit to businesses as a key factor in averting permanent damage to the economy, but there remains uncertainty as to how effective credit programs have been in reaching those most at risk (eg. SMEs). Overall, the authorities acknowledge that given the unfavorable economic outlook, further monetary stimulus could be required. With the policy rate at its technical floor of 0.5% (and signals that it will remain at such levels for a prolonged period), the board will focus on a broader use of non-conventional policies to enhance the monetary impulse and support for financial stability. We see the board retaining the policy rate at 0.5% for at least the next 12 months, while building on liquidity measures. Non-traditional monetary measures could include targeted liquidity lines and the purchase of securities. The effectiveness of such measures would also come down to how quickly they reach the intended targets. Hence, as the economy is in the midst of its most challenging period, we expect the board to announce additional support measures in coming weeks. **Full story here.


Retails sales contracted 1.3% yoy in March, below our forecast (0.4%) and market expectations (-1.0%). According to figures adjusted by working days, reported by the statistics institute (INEGI), the decline was slightly lower, of 1.1% (from -0.5%), taking the 1Q20 annual rate to 0.3% (from 2.0% in 4Q19). The real wage bill, the main private consumption determinant, decelerated 4.4% yoy in 1Q20 (from 5.3% in 4Q19), with formal employment declining 1.3% (from 1.7%). Likewise, consumption credit from commercial banks in real terms slowed down to 0.9% in 1Q20 (from 2.8% in 4Q19). In contrast, remittances in pesos jumped 26.3% in 1Q20 (from -1.6% 4Q19), as the Mexican peso weakened. Looking ahead, we expect private consumption to deteriorate sharply in the first half of 2020 due to the negative impact of the pandemic. While a recovery in the second half of the year is likely, consumption - and activity in general – will likely post a strong contraction in the full-year of 2020. **Full story here.

The CPI posted a bi-weekly rate of 0.30% in the first half of May (from -0.30% a year ago), far above our forecast of -0.02% and market expectations of -0.01%. The upside surprise came mainly from core inflation, which posted a bi-weekly rate of 0.24% (compared to our forecast of 0.17% and market expectations of 0.12%) due to a sharp increase of 0.80% in processed food prices. Headline CPI increased 2.83% yoy in 1H April (from 2.21% in 2H April), with core inflation also accelerating to 3.76% (from 3.61%). We expect inflation to end 2020 at 2.9%. The widening of slack conditions will likely curb inflation pressures, offsetting the effects of the exchange rate depreciation. The stickiness of core inflation reduces the odds of Banxico accelerating the easing pace. Meanwhile, the recent improvement of financial conditions (including the appreciation of the Mexican peso and lower credit risk premiums for both the sovereign and Pemex debt) should leave the board comfortable in keeping a 50-bp rate cut pace per meeting. ** Full story here.

Day Ahead: The Central Bank will publish Q1’s current account balance at 11:00 AM (SP time). We expect a surplus of USD 1.9 billion, taking the 4-quarter result to a surplus of 0.8% of GDP (from a deficit of 0.2% of GDP in 4Q19), due to an improvement in the trade balance.  


According to the Central Bank’s (BCRP) data, GDP contracted 3.4% yoy in 1Q20 (from 1.8% in the 4Q19), taking the 4-quarter rolling growth to 0.8% yoy in 1Q20 (from 2.2% in 4Q19). Final domestic demand contracted 1.2% yoy in 1Q20 (from 1.9% in 4Q19) dragged by private demand (-5.0%, from 2.5%), with consumption (-4.9%, from 3.0%) and investment (-19.6%, from 0.9%) contracting sharply amid social distancing measures and uncertainty over the economic outlook. In contrast, public demand expanded 8.4% (from -0.2%), with both investment (23.8%, from -5.8%) and consumption (10.1%, from 2.6%) accelerating. Finally, exports contracted 13.6% yoy in 1Q20 (from 1.3% in 4Q19), while imports dropped 6.4% (from 1.7%). We expect 2020 GDP to contract 3.7%, dragged by a negative shock from the pandemic, but with a downside bias given weak economic activity in 1Q20. A bold fiscal stimulus and an expansionary monetary policy will help to support the economic recovery in the second half of the year. **Full story here.

Using 4-quarter rolling figures, the current account deficit improved slightly to 1.4% of GDP in 1Q20 (from 1.5% of GDP in 4Q19), supported by lower net income payments (mainly profits from foreign mining firms) which stood at 4.1% of GDP (from 4.7% of GDP). In turn, the trade surplus deteriorated to 2.6% of GDP (from 2.9% of GDP), while the services deficit remained practically unchanged (1.4% of GDP). On the financing side, we note that Peru’s CAD is fully-funded by net foreign direct investment (3.1% of GDP in 1Q20, from 3.5% of GDP in 4Q19), also using 4-quarter rolling figures. **Full story here.

Using 12-month rolling figures, the nominal fiscal and primary deficit deteriorated to 3.7% of GDP in April (from 2.1% of GDP in February pre-COVID) and 2.2% of GDP (from 0.6% of GDP), respectively. The deterioration in the fiscal accounts is explained by lower tax revenues (-16.3% yoy in real terms YTD in April) due to weakness in economic activity and tax relief measures amid the outbreak. In turn, current expenditures increased 13.2% yoy in real terms YTD in April, also associated to the fiscal stimulus to mitigate the impact from COVID-19. Turning to public debt ratios, gross debt and net debt remained practically unchanged at 26.2% of GDP and 13.2% of GDP, respectively, in 1Q20 as the fiscal deterioration started in April. Amid the weak economic outlook and large fiscal stimulus (8.8% of GDP), we expect the fiscal balances to deteriorate further (nominal fiscal deficit of 8.5% of GDP for 2020), putting upward pressure to gross public debt (35% of GDP expected for the end of 2020). **Full story here.


According to FGV’s monthly survey, consumer and retail confidences increased somewhat in May, after declining sharply in April. Consumer confidence increased 3.9 p.p., to 62.1, strongly influenced by the expectations component, which rose 6.7 p.p. to 61.7, while the current conditions component receded 0.6 p.p. to 65.0. Meanwhile, retail confidence increased 6.2 p.p., to 67.4, mainly driven by an improvement in the current conditions component (+8.4 p.p., to 69.3), while the expectations component also advanced 3.7 p.p. to 66.9. In the preview survey, published by FGV two weeks ago, consumer confidence indicated a 6.5 p.p. gain in May, while retail confidence pointed to a 4.7 p.p. increase. In spite of the positive results registered in May, both consumer and retail confidence indexes remain at a very weak level. It’s worth mentioning that the preview of the industrial confidence, released Thursday, also increased in the month (2.4 p.p.).

COVID-19 update: the latest official information from the Ministry of Health is that Brazil has 363,211 confirmed cases (up by 15,813 vs 16,508 from the day before), with 22,666 confirmed deaths (up by 653 vs 965 from the day before), which implies a 6.2% mortality rate. There are now 149,911 recovered cases (up by 7,324 vs 7,157). Regarding the ICU occupation, in São Paulo, the rate of beds for COVID-19 patients now stands at 92% in the capital (from 89%) and 76% in the state (from 74%). 

Itaú Daily Activity Index: Our Daily Activity Index has increased 0.7 p.p. in the last available day (to 78.7), while the 7-day moving average dropped 0.2p.p., to 73.8. The index is down 21% when comparing the latest data available (Wednesday, May 20th) with the first half of March. See our report here.

The Week Ahead in LatAm


The trade balance for April will come out on Wednesday. We expect to see a full impact of the lockdowns for Covid-19, leading to a year-over-year drop in both exports and imports. We forecast a surplus of USD 1.0 billion in April (down from USD 1.2 billion surplus registered in the same month of 2019). If our forecast is correct, the trade surplus accumulated over the last 12 months will fall to USD 17.2 billion from USD 17.3 billion in March 2020.


May’s IPCA-15 inflation will be released on Tuesday. We forecast a 0.56% monthly decrease, leading the 12-month reading to 1.99% (from 2.92% in April). Fuels and airfare tickets will likely post the largest downward contribution in the month, and we expect all core inflation measures to remain decelerating. Additionally, May’s IGP-M inflation will be released on Thursday, for which we forecast a 0.16% monthly increase. On Friday, the ANEEL announces the tariff flag on electricity bills for June, which we expect to continue on green mode, with no additional tariff.

On economic activity, the main release will be the GDP reading for 1Q20 (on Friday). We forecast a 1.4% decline qoq/sa, with agricultural output rising 1.5%, industrial output declining 0.9% and services dropping 1.6%. Our forecast for Q2 is a 10.6% qoq/sa decline (not annualized), as social distancing measures remain in place for the bulk of the quarter. We see the economy recovering from Q3 onwards, leading the GDP to decline 4.5% in the whole year, and to increase 3.5% in 2021. Additionally, the unemployment rate for April will be published (Thursday). The economy has been losing jobs, but the participation rate has also been falling, which creates uncertainty for unemployment rate forecasts. We expect the unemployment rate at 13.5% seasonally-adjusted (13.9% without seasonal adjustment), assuming the participation rate will recede to 60.5% from 61.0%, seasonally-adjusted. If the participation rate remained at its February level (61.8%), the unemployment rate would rise to 15.4% seasonally-adjusted in April. Finally, FGV business confidence surveys for May on the construction, retail, industrial and service sectors, as well as for consumers, will be released throughout the week.

On external accounts, we expect the current account (Tuesday) to post a USD 3.2 billion surplus in April, the second monthly surplus in a row and far above the USD 1.9 billion deficit registered in the same month of 2019. Importantly, April will be the first month fully impacted by the coronavirus. We expect the deficits in the service (especially international travels) and profits and dividends accounts to drop sharply. Additionally, the trade balance had a strong positive result in the month, also contributing to the expected surplus. The current account deficit over 12 months is likely to recede to USD 43 billion (2.4% of GDP), with the 3MMA SAAR falling to USD 15 billion (from USD 48 billion). Direct investment in the country (DIC) will likely amount to USD 2.1 billion in the period, with the D IC over 12 months reaching USD 76.5 billion.

On fiscal accounts, April’s central government’s balance will be released on Thursday, for which we expect a BRL 111.3 bn deficit. On Friday, the consolidated public accounts, also for April, will be published. We expect the consolidated primary balance to reach a BRL 113.4 bn deficit in the month.

On Thursday, the Central Bank will publish April’s credit report.

Finally, the evolution of the coronavirus outbreak and policy measures to contain the impacts of the surge, such as potential announcements by regional governments regarding isolation rules, will continue to be closely monitored throughout the week. The Congress may vote the MP 936, which addresses supplementary labor measures such as the Emergency Employment and Income Maintenance Program. The text is already in force, but, being a provisional measure, it needs to be validated by Congress in due time, and is subject to changes.


On Tuesday, the central bank will release the results of the financial traders’ survey. At the end of April, traders already adjusted inflation expectation down by 30bps for the one-year outlook to 1.85%, while envisioning the policy rate to be held stable at 0.5% for at least the next year. One possible edit this month could be an upward readjustment in inflation expectations as the statistics institute announced a methodology approach during the quarantine period that puts an upside bias to some prices.

The national institute of statistics (INE) releases activity indicators for April on Friday. With the implementation of social distancing measures from mid-month, activity weakened significantly in the month. Retail sales contracted 14.9% yoy (+4.5% previously), dragged by apparel and car sales. Meanwhile, manufacturing rose a mild 0.6% (3.3% previously), with the less striking fall possibly due to lockdown orders not meaningfully affecting manufacturing districts. For April, electricity generation declined 0.2% yoy (2.1% in March), hinting at a manufacturing fall of 5.5% (similar to the decline in the social unrest October). Meanwhile, with car sales falling 73% yoy in the month and consumer confidence slumping to historic lows, the retail sales drop would deepen to 25% (-14.9% previously).

On the same day, INE releases the national unemployment rate for the quarter ending in April. The labor market loosened in the first quarter of the year, on the back of a confidence hit following the 4Q19 social unrest and March’s coronavirus shock. The unemployment rate increased 1.0pp over one year to reach 8.2%. With the coronavirus shock to the economy consolidating, we expect further loosening of the labor market. For the quarter, we expect an unemployment rate of 8.7% (1.6pp up from last year).


On Wednesday, think-tank Fedesarrollo will publish the business confidence indicators for the month of April, which should reflect a continued deterioration of private sentiment. During the month of March, business confidence dropped to historical lows as the Colombian economy shut down amid the Covid-19 crisis. Industrial confidence came in at -35.0% (0 = neutral), 38pp lower than one year ago (+9.8% in February). The previous low was recorded in March 1999. Meanwhile, retail confidence deteriorated pointedly to -30.8% (+27.5% in March 2019 and +28.3% in February), as the outlook for the economic situation in the upcoming semester collapsed.

On Friday, the institute of statistics will release the unemployment rate for April. The labor market loosened significantly in March, as the impact from the extensive lockdown and a deteriorated economic outlook filtered through to job losses. The national unemployment rate for Match rose 1.8pp over one year to reach 12.6%, while the urban unemployment rate increased 1.4pp to 13.4%. Total employment contracted 7.2% yoy in March, the sharpest decline on record. Meanwhile, the participation rate retreated 4.0pp from March last year to 59.2%, containing a further surge in the unemployment rate but reflective of the downbeat economic environment. For April, we expect the urban unemployment rate to rise to 15.1%, 4pp up from last year.

On the same day, the central bank holds its monetary policy meeting at which we expect a third consecutive 50bp rate cut to 2.75%. General Manager Echavarria and other board members have indicated that the board’s focus is on liquidity measures that ensure the smooth functioning of the financial system, and is uncertain over how effective lower rates would be in curtailing the economic downturn. However, we believe that the significant activity drop from 4Q19 to 1Q20, prior to the worst period of the crisis, would convince board members to continue to lay a favorable groundwork that would support an economic recovery ahead. The May meeting was initially scheduled as one of four non-policy rate meetings of the year, but has since been converted to allow for a rate discussion under the turbulent scenario. Nevertheless, risks tilt towards a smaller rate cut (of 25-bps). Besides some skepticism within the board over how effective the policy rate is to boost activity in the current environment, some board members seem concerned over potential capital outflows (and their resulting pressure on the currency) coming from negative real interest rates. Furthermore, the new board meeting calendar (with policy rate decisions scheduled for every month) reduces the risk of acting more gradually.   


On Tuesday, the national statistics institute (INEGI) will publish Q1’s GDP, which we expect at -1.5% YoY (from -0.5% in 4Q19), slightly above the flash GDP estimate announced three weeks ago by INEGI (-1.6%), after a better than expected industrial production in March. The figure will also show a sharp deterioration in services sector due to distancing measure implemented since March amid the outbreak.

Together with the quarterly data, INEGI will publish March’s monthly GDP proxy (IGAE), which we expect to fall by 3.1% YoY (from -0.6% in February). This forecast is consistent with our estimate for 1Q20 GDP growth.

In the middle of the week, the Central Bank of Mexico (Banxico) will publish the quarterly inflation report (4Q19). In this document, Banxico will provide an update of its macro outlook on the Mexican economy. The Central Bank will likely lower their GDP growth forecasts significantly, reflecting the negative shock from the outbreak. It will be key to monitor the changes for the inflation outlook, amid shocks to consumer prices in opposing directions.

On Thursday, Mexico’s Central Bank (Banxico) will publish the minutes of May’s monetary policy meeting (held two weeks before), in which the Board unanimously voted for a 50-bp cut, reaching a rate of 5.50%. The minutes will shed more light on the discussion between board members over the monetary policy easing pace, amid differences over the balance of risks for inflation. 

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