Itaú BBA - Evening Edition – Banrep cuts policy rate by 50bps

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Evening Edition – Banrep cuts policy rate by 50bps

Abril 30, 2020

Given the drastic outlook deterioration for the Colombian economy, we see room for at least one more 50-bp rate cut to 2.75%

Talk of the Day


At the April monetary policy meeting, the central bank board unanimously opted to ease monetary policy further with a 50-bp cut to 3.25% and reinforced liquidity measures. The decision on the policy rate was widely expected by the market. While the communique is low on insight, the tone from general manager Echavarria’s press conference signals that the door is open to more easing. Given the drastic outlook deterioration for the Colombian economy, we see room for at least one more 50-bp rate cut to 2.75% despite still significant vulnerabilities. Meanwhile, the board will continue to utilize its other monetary policy tools to ensure no significant tightening of financial conditions that could exacerbate the effect of the current shocks on the Colombian economy. The next monetary policy decision will take place at the end of June, but we note General Manager Echavarría did not rule out a rate decision taking place at the May gathering. ** Full story here.

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% (in between the Bloomberg market consensus of 12.8% and our 13.8% expectation). 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. As the dual shock from the virus and oil prices filter through to the Colombian economy, further loosening of the labor market is expected. We forecast the unemployment rate to average 12% this year, up from 10.5% last year, with risks tilted to the upside if the economic recovery in 2H20 underwhelms. The economic risks are in line with the central bank continuing to ease monetary policy beyond 3.25% and for fiscal authorities to build on its response package with a focus on protecting income and jobs. ** Full story here.


With the implementation of social distancing measures from mid-March, activity weakened significantly in the month and a deeper deterioration is expected for April. Retail sales contracted 14.9% yoy (+4.5% previously), well below our call of a 6.3% drop and the -6.8% Bloomberg consensus. Apparel and car sales were the key drags. Supermarket sales, on the other hand, increased 9.8% yoy (1.3% previously), likely due to fears of shortages and hence the drive to stockpile. Meanwhile, mining production rose 2.3% (9.9% previously), reflecting a milder impact from the mitigation measures, while manufacturing rose 0.6% (3.3% previously), below our 1.8% call but above the Bloomberg market consensus expectation of a drop of 1.5%. One explanation for the manufacturing growth could be that the lockdown orders did not affect meaningfully manufacturing districts. Overall, sectorial activity in March was already affected by the social distancing measures adopted, and points to a GDP proxy (IMACEC) contraction of 1% (+2.7% in February). This would result in growth of 0.9% in 1Q20, a mild recovery from the 2.1% fall in the social unrest hit 4Q19. Although economic data is only starting to reflect the impact of the coronavirus shock, there is already evidence of a sharp activity deterioration ahead. The swift deterioration in retail data is likely to persist given the rapid loosening of the labor market and downtrodden confidence. Meanwhile, heightened uncertainty and lack of demand would halt investment projects. We see activity shrinking 1.9% this year (+1.1% last year), but risks are tilted to a sharper decline. While the announced fiscal stimulus packages and added monetary impulse would contain the fall, the closure of commercial operations, self-isolation practices and lingering fear could restrain a domestic demand bounce back. ** Full story here.

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, but the increase in the unemployment rate was not as rapid as expected. In 1Q20, the unemployment rate increased 1.0pp over one year to reach 8.2%, below the Bloomberg market consensus of 8.4% and our call of 8.7%. In the Santiago Metropolitan area, the labor market deterioration was somewhat larger with the unemployment rate up 1.2pp to 8.7%. The latter development is understandable given Santiago is the country’s economic hub (most affected by social unrest), while also being home to the largest population affected by social distancing measures. Complementary information provided by the labor ministry show that layoffs increased 36.8% yoy, similar to the print at the close of 2019. The deterioration of the global and domestic economic outlook would result in a significant rise in joblessness. We see the unemployment rate averaging 9.0% this year (7.2% last year), while likely exceeding 10% in the coming months. Policy makers will remain attentive to adjust their responses if signs increase that the transitory nature of the shock could become more permanent. ** Full story here.


The unemployment rate reached 12.2% in March, below expectations (mkt: 12.5%, our call: 12.7%), because of the drop in the workforce. Seasonally-adjusted, unemployment rate reached 11.6%, from 11.5% in the previous month. The increase was small because the workforce decline offset the employment drop. The participation rate declined to 61.1% from 61.8% in the previous month, seasonally-adjusted. In other words, the unemployment rate didn’t increase faster because the number of people looking for jobs declined, probably due to the social distancing measures. Employment declined by 1.1% mom seasonally-adjusted, the average real wage increased 0.3%, and the real wage bill declined 0.2% (+1.5% yoy). The decline was relatively soft, because of the increase in the average real wage, which may have increased because formal employment (with higher real wages) suffered less than informal employment, thus gaining share in total employment. ** Full story here.

The consolidated public sector posted a primary deficit of BRL 23.7 billion in March, which was close to market consensus (BRL 23.5 billion) and worse than our forecast (BRL 19.6 billion). The central government printed a deficit of BRL 21.2 billion under the National Treasury’s methodology (which considers the gap between revenues and expenses), better than our BRL 25 billion estimate. Regional governments posted a deficit of BRL 2.7 billion (vs. an anticipated surplus of BRL 1.5 billion), while state-owned companies delivered a BRL 0.4 billion surplus. The consolidated primary deficit over 12 months widened to 0.9% from 0.8% of GDP. The general government’s gross debt climbed to 78.4% of GDP in March from 76.7% in February, while net debt fell to 51.7% of GDP from 53.6%, reflecting FX depreciation during the month. Over 12 months, the nominal deficit excluding swap transactions remained at 5.5% of GDP.  Contracting economic activity and measures implemented to cushion the impact of the coronavirus crisis will cause sharp deterioration in fiscal results in 2020, but it is vital not to create permanent expenses, so that the gradual fiscal adjustment enabled by the spending cap constitutional amendment can resume from 2021 onwards. ** Full story here.

Senate Speaker, Davi Alcolumbre, presented a new draft for the financial aid to states and municipalities proposal. In this new version, the amount of aid will be limited to BRL 60 billion (0.8% of GDP) over four months instead of the unlimited tax revenue compensation over six months approved by the lower house in mid-April. The bill also establishes that public employees’ salaries will not be increased until 31 December 2021. Local news indicate that the voting will probably take place on Saturday.

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 85,380 confirmed cases (up by 7,218 vs 6,276 yesterday), with 5,901 confirmed deaths (up by 435, vs 449 yesterday). 


Mexico’s GDP preliminary estimate was weak in 1Q20, starting to reflect negative effects from COVID-19.  The flash estimate of GDP growth for 1Q20, published by Mexico’s statistics institute (INEGI), came in at -1.6% year-over-year, below our forecast (-0.9%) and above market expectations of -2.0% (as per Bloomberg). The quarterly figure implies the monthly GDP proxy for March contracted around 3.3% year-over-year (from -0.6% in February), reflecting the negative effects from the outbreak. According to calendar & seasonally-adjusted data reported by the statistics institute (INEGI), GDP in 1Q20 contracted at a faster pace (-2.4% year-over-year in 1Q20, from -0.5% in 4Q19). Looking at the breakdown, also using calendar & seasonally-adjusted data, industrial sector contracted 3.8% in 1Q20 (from 2.1% in 4Q19), while services sector deteriorated to -1.4% (from 0.0%). Our -3.7% GDP growth forecast for this year has a downside bias amid a shy fiscal stimulus to support the economic recovery in 2H2020, after a sharp contraction expected in the 2S20 due to social distancing measures to contain the coronavirus outbreak. Uncertainty from domestic policy direction is also a drag to Mexico’s economic outlook. ** Full story here.

The Week Ahead in LatAm

The Week Ahead in LatAm


Manufacturing and construction data for the third month of the year will see the light on Tuesday. According to coincident indicators, both indexes showed year-over-year drops in March due to the first impacts of the lockdown. The industrial index (IPI), published by FIEL think tank, fell 6.4% against March 2019 (-0.9% mom/sa), while construction activity, according to Grupo construya, plummeted 39.5% yoy.  

On Wednesday, the central bank will release its monthly expectation survey. In the previous survey, analysts left their inflation forecast for 2020 at 40.0%, while increased it to 33% for 2021, from 30.5%. In the previous survey, pundits reduced their GDP growth forecast for 2020 to -4.3%, from -1.2%, considering the effects of COVID-19. Other variables surveyed are Badlar interest rate, exchange rate and primary fiscal balance.


The Covid-19 surge and its developments will continue to be under the spotlight in the coming week, as well as policy measures to contain the impacts of the pandemic, including possible announcements by state governments about isolation rules. The Congress may move forward with discussions regarding the so-called “War-time Budget” amendment and the financial aid to states and municipalities, to compensate for lower tax revenues expected for this year.

The Copom will publish its monetary policy decision on Wednesday. We expect the Copom to reduce the Selic rate by 50 bps, to 3.25% pa, at the meeting of May 5 and 6, and to signal caution regarding additional movements. We understand that a cut of this magnitude is consistent with the need for further stimulus to the economy at a time when economic activity is being strongly impacted by the Covid-19 pandemic. In light of the deterioration in public accounts resulting from the crisis, interest rate cuts of greater magnitude could be counterproductive for financial conditions. A persistent deterioration in the fiscal path, which may unfold in the coming months, could even remove the possibility of maintaining monetary accommodation for a prolonged period, but this is not, at the moment, our baseline scenario. ** Full story here.

April’s IPCA inflation will be released on Friday. We forecast a 0.26% monthly deflation, leading the 12-month reading to 2.5% (from 3.3% in March). Food prices are likely to pressure upwards, while industrial items (such as vehicles and appliances) and fuel prices are likely to post sharp drops in the month. As has been the case in recent IPCA readings, we expect all core inflation measures to remain on a benign path.

On economic activity, the highlight will be industrial production for March (Tue.), for which we forecast an 8.0% mom/sa decline, impacted by lockdown measures that started in mid-March. Auto sales (without a scheduled date) and production (Thu.) for April will also be published. The decline of economic activity will likely be stronger in April than in March, because social distancing measures were in place for the entire month in April.

April’s trade balance will be released on Monday. We expect a USD 5.9 billion surplus, close to the USD 5.8 billion registered in the same period last year and leading to a roughly stable trade surplus over 12 months, at USD 43 billion. The 3mma seasonally adjusted surplus is set to increase to USD 49 billion. Both exports and imports are expected to decline in the month (-6.1% and -16.1%, respectively), reflecting the drop in global trade due to the coronavirus outbreak.


On Monday, the central bank will publish the GDP proxy (Imacec) for March. Prior to the coronavirus pandemic outbreak, activity was recovering. Imacec expanded 2.7% yoy, with mining posting the strongest growth since early 2018 (10.4% yoy), while non-mining activity (led by manufacturing and construction) also improved to post the highest growth rate since before the protest action in October 2019 (2% yoy). As the direct impact of the social distancing measures start to be reflected in March we expect a monthly contraction of 3.7% MoM, resulting in a yearly fall of 1.0%. As a result, growth in 1Q20 would come in at 0.9% (2.1% drop in 4Q19). 

Think-tank Icare’s April business confidence will come out at the start of the week. Business confidence showed the first signs of impact from the coronavirus pandemic in March dropping 13.3 points to 40.7 points (50 = neutral). All sub-indices deteriorated, with construction leading the fall with a 30.3 point drop over 12 months (to 24.5). As the domestic and global economies grind to a halt in 2Q20 due to the direct impact of the virus and the countermeasures adopted, we expect business confidence to retreat further into pessimistic territory.

The central bank will announce its decision from the scheduled monetary policy meeting on Wednesday evening. Having taken the policy rate swiftly to its technical floor of 0.5%, stable rates will be the name of the game. Nevertheless, the communication would likely emphasize the message of low-for-long and reiterate the preparedness to respond through boosting QE tools if risks for the economy increase even further.

The April trade balance will be released on Thursday. Another large trade surplus was registered in March as domestic demand and lower global oil prices aid a swift correction of external imbalances. The rolling 12-month trade balance sits at a USD 5.6 billion surplus (USD 4.2 billion last year). We expect the April trade data to show both exports and imports dropping significantly, but the impact from lower fuel prices, weakened consumer goods imports and hampered investment outlook (affecting capital imports) outweighing the export fragility. As a result, we expect a USD 1.0 billion trade surplus (USD 0.4 billion last year). 

Nominal wage growth for March will be released on Thursday. Nominal wage growth ticked-down 0.2pp to 4.5% yoy in February. Going forward, the disruption to global business operations and low private sentiment would lead to a more significant deterioration of the labor market ahead and restrict wage growth.

On Friday, the institute of statistics (INE) releases inflation for April. After five consecutive months of acceleration, headline inflation ticked down 0.2pp to 3.7% yoy in March, as weaker demand counters pass-through pressures. For April, we expect consumer prices to fall 0.1% from March (+0.3% last year), dragged down by lower fuel prices and the suspension of stamp and seals taxes. As a result, annual inflation would drop to 3.4%. 


The minutes of the this week’s meeting, at which the central bank cut the policy rate by 50bps to 3.25%, will be released on Monday. The minutes will likely put emphasis that the immediate focus remains on ensuring the smooth functioning of the financial system, while acknowledging that lower rates would be key to support an activity recovery once there is some normalization operations ahead. 

On Tuesday, the Colombian national institute of statistics (DANE) will release the inflation print for April. Inflation accelerated in March (to 3.86% from 3.72% in February), the highest rate since October last year, driven by food prices. However, core inflation indicators remained well-behaved. We expect CPI of 0.22% MoM (0.49% last year), lifted by food and housing expenses, while partly countered by falling fuel prices. Annual inflation would tick down to 3.57%.

On Wednesday, the central bank will present its quarterly monetary policy report. The update will likely show a significant deterioration to growth expectations for this year (previously similar to last year’s 3.3%), a much swifter fall to the target for inflation and the likelihood that the policy rate would continue to fall going forward.


On Thursday, INEGI (the statistics institute) will publish CPI inflation figures corresponding to the full-month of April. We expect headline and core inflation at -0.97% mom (from +0.05% a year ago) and 0.40% (from 0.46% a year ago), respectively. We expect headline inflation to be pulled down by a sharp decline in electricity prices due to seasonal “summer” subsidies to electricity tariffs, lower gasoline prices and a fall in non-core food prices (despite the sharp increase in egg  and lemon prices). Assuming our forecast is correct, headline and core CPI would grow 2.22% yoy (from 3.25% in March) and 3.55% (from 3.60%), respectively.  

Ending the week, the Statistics Institute (INEGI) will announce February’s gross fixed investment, which we expect to decrease 9.1% YoY (from -8.8% in January). On an annual basis, coincident indicators, construction output, imports of capital goods and business confidence remained weak. 


The central bank will publish the CPI inflation for April on Monday. Inflation has been well behaved and has remained below the center of the target range (4%+-2%) since November 2018. We forecast 0.0% mom inflation for April, bringing the annual figure to 2.2% from 2.5% in March.   


On Thursday, the Central Bank of Peru (BCRP) will publish its May’s monetary policy meeting. We expect the BCRP to keep its policy rate at 0.25%. In the last montetary policy decision, the BCRP didn’t mention the possibility of cutting further the policy rate. However, they will continue to monitor inflation and its determinants to relax further the monetary policy stance using different tools.


The consumer prices index for April will see the light on Tuesday. Inflation reached 1.3% mom in March, bringing the annual reading to 9.2%. We expect an acceleration of inflation in April, mostly due to tariff adjustments (around 10% in electricity, communications and water). Thus, we project 1.7% mom inflation for April, taking the annual reading to 10.5% yoy.

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