Itaú BBA - Evening Edition – Copom minutes point to stable interest rates for the time being

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Evening Edition – Copom minutes point to stable interest rates for the time being

Fevereiro 11, 2020

The document indicated that the authorities are firmly on hold, at least for now, but may be divided on the key issue of the magnitude of the output gap.

Talk of the Day


The Copom released the minutes of its latest monetary policy meeting. The document indicated that the authorities are firmly on hold, at least for now, but also suggested that the committee members may be divided on the key issue of the magnitude of the output gap. In all, the text pointed to unchanged interest rates for the time being – we expect the Selic to end the year at the present 4.25%. However, if the supply-side constraint view becomes dominant within the committee, with monetary stimulus still in the pipeline, then the next policy move would be up, rather than further down, although this may take several quarters to materialize. ** Full story here.

Tomorrow’s Agenda: The retail sales for December will be released at 9:00 AM. We forecast a 0.5% mom/sa decline for the broad index and stability (0.0% mom/sa) for the core index, which excludes vehicles and construction material.


The Treasury postponed unilaterally the payment of a peso-denominated bond. After a failed exchange and an auction to raise funds to afford a bond maturity of ARS 100,000 million (equivalent to USD 1.2 billion at the blue chip swap rate), the government decided to delay the payment of the principal until September 30. The Treasury committed to pay interests during that period. In the meantime, the Treasury will offer new peso denominated bonds in exchange of this obligation. The decision followed the failed attempt of the Province of Buenos Aires to delay the payment of a dollar-denominated bond under foreign legislation and increases the uncertainty regarding the outcome of the incoming dollar debt negotiation targeted for end-March. In December last year, the Treasury already postponed all the payments of dollar-short term bills until August.


Industrial production was weak in December, at -0.3% mom and -1.0% yoy. While the breakdown of the month-over-month number was more encouraging, with demand-driven sectors (manufacturing and construction) performing well (0.53% and 0.57%, respectively), industry and its main components performed very poorly during the full 4Q19. Industrial production fell by 5.3% qoq/saar, with manufacturing contracting by 8.1% and construction down by 4.5%. Helped by an improvement in oil production, mining sector expanded by 3.55% qoq/saar.


In the first month of 2020, new car sales reached just over 32 thousand, a 12.1% yoy drop, the worst start to a year since 2017. Yet, the fall in car sales moderated from the final quarter of 2019 (-21% in 4Q19; -11.1% in the previous month), as activity normalized following the social events that began in October. In the quarter ended in January, car sales fell a sharp 16.7% yoy (-6.2% in 3Q19). After adjusting for seasonal factors, car sales slump 35.7% qoq/saar, building on the 47.7% drop recorded in 4Q19 (+5.4% in 3Q19). Low private sentiment, alongside an expected loosening in labor market and the impact of the recent depreciation on domestic-currency prices for imported vehicles and other consumer goods, reinforces the expectation of a deterioration in consumption ahead.

The central bank analyst survey for February retained the view of controlled inflation, downbeat growth and stable rates for a prolonged period. The year-end inflation expectation remained at 3.2% (Itaú: 3.3%) and 3.0% for 2021 (in line with our call). Following the higher than expected print in January, the one-year inflation outlook moderated 0.2 p.p. to 3.0%. Meanwhile, growth for this year stayed at a low 1.2% (similar to last year and in line with our view), but fell 0.3 p.p. to 2.2% for 2021 (Itaú: 1.9%), consolidating the view that recent developments would keep uncertainty levels elevated and restrict a meaningful domestic demand recovery. In this context, rates are expected to remain at the expansionary 1.75% level for at least a year and a half, before a gradual normalization process begins. Inflation would rise in coming months before ending the year at a near-target level of 3.3%, below the central bank’s current 3.5% forecast. We expect the 1Q20 IPoM update will reflect the diminished inflationary pressure, along with a potential upside revision to its growth forecast range for 2020 (currently at 0.5%-1.5%). Overall, caution regarding future rate moves will still likely prevail in the short term as the board opts to accumulate and digest additional information. Although we still expect more easing later in the year (to 1.25% by year-end), we note that the risks tilt toward stable rates given the domestic uncertainties and the central bank’s already-expansionary monetary policy stance.

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