Itaú BBA - Evening Edition – Banxico cuts reference rate by 50bps in intermeeting decision

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Evening Edition – Banxico cuts reference rate by 50bps in intermeeting decision

Março 20, 2020

We expect a policy rate of 5.50% by the end of 2020

Talk of the Day


Banxico cut its policy rate by 50-bp (bringing it to 6.50%) in a meeting that was anticipated (originally scheduled for March 26th). The decision wasn’t unanimous as one of the board members voted for a 25-bp cut. Although the anticipation of the meeting came as a surprise, the magnitude of the rate reduction was in-line with our expectation. The statement reflects a cautious tone, as it mentions the uncertainty as to the balance of risks for inflation has increased. While the widening of slack conditions together with a decline in energy prices may put downward pressure to inflation, it could be offset by upward pressures from the depreciation of the currency. In this sense, Banxico expects inflation to continue with a downward trend, but at a slower pace than expected. On the other hand, downside risks to economic activity have increased.  The Board expects an even greater than anticipated widening of output gap due to the negative effects on the economy from the coronavirus outbreak, in a context of further weakening of global economic activity. Despite the cautious tone, we expect Banxico to continue easing its monetary policy stance, reaching a rate of 5.50% before the end of 2020. The widening of output gap and a substantial wider relative monetary policy position supports the central bank continue cutting the policy rate. However, the sharp depreciation of the currency, the impact of lower oil prices on Pemex balance sheet and on-going uncertainties over domestic policy direction stand in the way of more aggressive rate cuts.

Aggregate supply contracted 1.6% in yoy terms (Itaú: -0.6%; mkt: -0.9%) below 3Q19 growth rate of -0.2%. Domestic demand fell by 0.5% yoy in 4Q19 (from -1.1% in 3Q19), while exports of goods and services contracted sharply (-2.8%, from +2.8%). Within domestic demand, final public demand kept contracting (-2.8%, from -3.6%), with government’s consumption (-0.2%, from -2.0%) improving, but public gross fixed investment deteriorating further (-12.8%, from -9.9%). On the private side, final demand improved, but expanded at a soft pace (0.0%, from -0.6%), with private consumption and private gross fixed investment growth rates at 0.9% (from 0.8%) and -3.8% (from 5.9%), respectively. We expect GDP to decline 2.5% in 2020. The sharp contraction of economic activity in 2020 is associated to a transitory demand and supply negative shock due to the coronavirus outbreak. Looking forward, we expect economic activity to recover to 4.3% in 2021 as the negative shock fades away. ** Full story here.


The Senate approved the request of State of Public Calamity sent by the government in the beginning of the week. With this measure, the Administration will be allowed not to meet the fiscal target established for 2020 (BRL 124.1 billion deficit). The measure will be in force until December 31.

According to FGV’s monthly survey, business confidence preview in the industrial sector declined 3.2 p.p. in March (to 98.2, below the 100 neutral level). The breakdown shows that the expectations component that fell 4.1 p.p. (to 97.7), while the current conditions component receded 2.1 p.p (to 98.8). The installed capacity utilization level (NUCI) dropped 1.1 p.p., to 75.1%. The survey was conducted between March 2 and 18, so it already considers the very beginning of the coronavirus outbreak. In our view, these figures start to reflect the contraction that will soon materialize, and are set to deteriorate further.

Last night the government announced that foreign passengers coming from international flights will be barred from entering the country for 30 days. The measure will be in force from March 23 onwards, and will not apply to Brazilian citizens, nor foreigners with previous residence authorization. The government also determined the closure of borders with neighboring countries. This measure – already in force – will initially last for 15 days.

The BCB auctioned USD 1 billion in the spot market (but only USD 175 million were sold). The BRL appreciated around 1.5% in the session, at 5.03 per dollar.

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 904 confirmed coronavirus cases, with eleven confirmed deaths.


In an extraordinary meeting, the Central Bank of Peru (BCRP) decided to cut its policy rate by 100-bps (to 1.25% from 2.25%). In the decision, the Board took into account the negative supply and demand shock to the economy associated to the coronavirus outbreak and that downside risk to global and domestic economic activity have increased, including the possibility of a global recession during the first half of the year. 

The BCRP left the doors open for further easing the monetary policy rate. While the policy stance is already very expansionary and at the same level as in the global financial crisis in 2009, the statement mentioned the board will monitor inflation and its determinants to continue easing its monetary policy rate. 

The BCRP also expressed willingness to carry out all the necessary actions to support the payment system and the credit channels. The Board noted the operations carried out during the current month to inject liquidity to the financial system through the repo market and is studying to implement new measures to inject liquidity if necessary.   


Argentina on lockdown. President Fernandez announced tough measures to contain the dissemination of the corona virus. From now, until March 31, Argentines will have to stay at home, with just few exceptions. The country had shut borders and canceled school attendance and flights the days before. As the decision will likely lead to more recession, the government said that additional fiscal measures will be implemented soon.

The Week Ahead in LatAm


The GDP figures for 4Q19 will see the light on Wednesday. We expect a 1.0% year-over-year drop, in line with the official monthly GDP proxy (EMAE). If this figure is correct, the GDP will post a contraction of 2.1% year-over-year in 2019.

The INDEC will release the current account balance for 4Q19 on Thursday. The current account deficit fell to USD 1.1 billion in 3Q19 from USD 7.4 billion in 3Q18. We expect to see a new reduction in the current account deficit in 4Q19 as a consequence of a weaker peso and lower internal demand. Our forecast for 2019 is a deficit of 0.6% of GDP. 

The trade balance for the second month of 2020 will also come out on Thursday. We forecast a surplus of USD 1.0 billion in February (up from USD 0.4 billion surplus registered in the same month of 2019) due to a weaker ARS and internal demand. If our forecast is correct, the trade surplus accumulated over the last 12 months would rise to USD 17.2 billion from USD 16.6 billion in January 2020.


The Central Bank will publish the minutes of its latest monetary policy meeting on Tuesday. On the occasion, the authorities ended up delivering the outcome that was (mostly) priced in, a 50-bp rate cut, in an unanimous decision. This took the Selic to 3.75% pa (we had been expecting a more moderate move). As in its previous meeting, the committee went out of its way to moderate market appetite for additional easing. It stated that doubts about the continuity of fiscal reform may turn additional easing moves counter-productive, as they might result in tighter financial conditions. The statement also indicated, explicitly, that for now the authorities see base rate stability, at the new level, as adequate, whilst conceding that they are dealing in an especially uncertai n scenar io (see more here). Additionally, on Thursday, the Central Bank releases the 1Q20 quarterly inflation report.

March’s IPCA-15 inflation will be released on Wednesday. We forecast a 0.04% monthly increase, leading the 12-month reading to 3.69% (from 4.21% last month). We expect food prices to rise 0.55%, after February’s deflation of 0.32%. We expect all core inflation measures to remain on a benign path. On Friday, the ANEEL announces the tariff flag on electricity bills for April, which we expect to continue on green mode, with no additional tariff.

On economic activity, next week’s highlights will be the retail sales (PMC) (Tue), service sector revenue survey (PMS) (Wed), IBC-Br monthly activity index (likely on Thursday) and, possibly, the CAGED formal job creation (without a specific date), all related to January. For the PMC, we forecast the broad indicator to recede 0.5% mom/sa, while core retail sales are expected to drop 0.7% mom/sa.  Regarding the PMS, we forecast a 0.7% mom/sa increase. For the IBC-Br, we forecast a 0.3% mom/sa advance (this estimate may change according to retail sales and service releases). In relat ion to C AGED, we forecast a net creation of 70k formal jobs (50k in seasonally adjusted terms, decreasing the 3-month s.a. moving average to 72k from 75k). Additionally, FGV’s business confidence surveys for March on consumer as well as on retail, construction and industrial sectors will be released throughout the week. 

On external accounts, we expect the current account (Wed) to post a USD 3.3 billion deficit in February, roughly stable relative to the USD 3.3 billion deficit observed in the same month of the previous year. With this result, the current account deficit over 12 months would add up to USD 52.1 billion, or 2.8% of GDP. The 3MMA SAAR is set to slightly worsen to a USD 60 bn deficit (from a USD 51 bn deficit in January). Direct investment in the country (DIC) will likely amount to USD 6.5 billion in February, with the DIC over 12 months receding to USD 77.2 bn from USD 78.4 bn (or 4.2% of GDP).

The Central Bank will also publish February’s credit report on Friday.

COVID-19 cases in Brazil (currently at 621, according to the Ministry of Health) are set to accelerate during the coming days. Other than the evolution of the surge itself, it will also be important to keep an eye open for additional economic measures that the government may take to complement those already announced (see more here). 


Midway through the week, think-tank Fedesarrollo will publish the industrial and retail confidence indicators for the month of February.  At the start of the year, both indicators advanced with industrial confidence reaching 12.2% in January (0 = neutral), up 5.9pp over twelve months (8.5% in December), and the highest January level since 2007. Meanwhile, retail confidence reached 32.3%, up 3.0pp from one year ago (29.7% in December) and the highest January reading on record (since 1997), consistent with dynamic retail sales activity. With oil prices already starting to slump in February, some confidence deterioration is expected in the month. Looking further ahead, developments related to the coronavirus would consolidate a more downbeat sentiment.

At the close of the week, the central bank of Colombia will hold its monetary policy meeting. Amid market stress during the month of March, the central bank announced liquidity measures to address the tightening of financial conditions. With NDFs and FX swaps auctions, the central bank will help ease dollar liquidity concerns. While global central banks moved to lower rates, wide twin deficits and the low oil price scenario amplify the vulnerability of the COP that could heighten inflationary pressures and reduce the appeal of monetary easing. Nevertheless, given the expected dire impact on activity, we expect the board to lower rates by 50bps to 3.75%.


On Tuesday, INEGI will publish the inflation figure for the first half of March. We expect bi-weekly CPI to grow 0.02% (from 0.26% a year ago), while core inflation stood at 0.20% (from 0.18% a year ago). The figure is expected to reflect downward pressure from lower gasoline prices (despite the reduction in the stimulus to the gasoline excise tax, which right now is at zero percent), associated to the fall in oil prices. Assuming our forecast is correct, headline and core CPI would grow 3.62% year-over-year (from 3.87% in the second half of February) and 3.65% (from 3.62%), respectively.

In the middle of the week, the statistics institute (INEGI) will announce January’s retail sales, which we estimate at 2.4% yoy (from 3.2% in December). The still decent growth of the real wage bill supported private consumption in January.

On Thursday, the national statistics institute (INEGI) will publish January’s monthly GDP proxy (IGAE), which we estimate fell by 0.3% yoy (from +0.7% in December). We already know industrial production recovered softly in January. In turn, we expect services sector moderated its pace.  

The same day, INEGI will announce February’s unemployment rate. We expect the unemployment rate to post 3.6%. Formal job creation continues to decelerate (1.5% in February, from 1.6% in January).

Also on Thursday, the Central Bank of Mexico (Banxico) will hold a board meeting to decide on the reference rate. We expect Banxico to cut the policy rate by 50-bp (reaching a rate of 6.50%) in response to the negative shock to the economy from the coronavirus outbreak, amid the aggressive monetary easing of the Fed. Nevertheless, we expect the tone of the statement to be cautious, expressing concerns about the capital outflows and the depreciation of the currency as commented by Banxico’s Governor last week.

Ending the week, INEGI will announce February’s trade balance, which we expect to post a surplus of USD 0.5 billion. 


The monetary policy meeting is scheduled for Monday. The central bank has cut the reference rate  by a cumulative 75bps to  3.25% in two extraordinary meetings this month.  In the latest press release, the BCP said the low inflation environment provides room to ease the monetary policy further to help mitigate the coronavirus impact on the economy.

The GDP figures for 4Q19 will be published on Friday. We expect a 3.6% year-over-year increase, in line with the official monthly GDP proxy (IMAEP). If this figure is correct, the GDP will post a 0% year-over-year growth in 2019. 

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