Itaú BBA - Evening Edition – Unanimous decision to cut rates in Chile

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Evening Edition – Unanimous decision to cut rates in Chile

Março 31, 2020

The decision was in line with market expectations and our call

Talk of the Day 


In a unanimous decision, the central bank of Chile’s board just announced a 50-bp cut on the policy rate. The decision was in line with market expectations and our call, as the board acts preemptively to mitigate the impact of the global pandemic. The press release indicates the 0.5% rate is a “technical minimum”, an argument used back in 2009 when the board took rates to a similar level, hinting that additional rate cuts are not on the cards. The board also increased purchases of bank bonds by USD 4bn, taking the total amount for this facility to USD 8bn. Expect a full report on this decision later tonight.

Activity indicators for the month of February continued to show the continuation of the activity recovery from the 4Q19 shock. However, the recent developments in March amid the coronavirus spread and the adoption of mitigating measures would halt any further progress. Retail sales accelerated to 4.5% yoy (0.2% previously), above our 1.0% call and the 2.5% Bloomberg consensus, while supermarket sales increased for the first time since September. Industrial production – aggregating mining, manufacturing and utilities – grew 5.6% yoy in February, following the 2.0% gain in January. Growth was lifted by a strong mining growth of 9.9% yoy (1.3% previously), in part favored by a low base of comparison due to floods last year, but also due to favorable operations at some plants. Meanwhile, manufacturing growth remained stable and upbeat at 3.7% yoy (led by non-machinery related metal production and food processing), albeit below our 6.5% call (3.5% Bloomberg market consensus). Overall, widespread growth in the month points to an upbeat February GDP proxy (IMACEC). Nevertheless, given manufacturing underwhelmed our expectations, we are revising our call to 3.3% yoy (1.5% in January). The outlook for growth this year was already unfavorable considering domestic uncertainty (affecting private sentiment and investment dynamics), and the COVID-19 pandemic only enhances the pessimism. While the announced fiscal stimulus packages and added monetary impulse would contain the decline, the closure of commercial operations and self-isolation practices are expected to have a meaningful impact on economic activity that would result in a further loosening of the labor market. We see an activity contraction of 1.6% this year as the most likely outcome (+1.1% last year). ** Full story here

The expected loosening of the labor market following the disruption to business operations and private sentiment in 4Q19 showed greater materialization in data for the quarter ending in February. With the economy facing another shock on a global scale, further loosening of the labor market is anticipated despite efforts by the authorities to shoulder some of the labor costs for business. The unemployment rate increased 0.8pp over one year to reach 7.8%, above the Bloomberg market consensus of 7.5% and our 7.3% call. In the Santiago Metropolitan area, the country’s economic hub, the labor market loosening was even more evident with the unemployment rate up 1.2pp to 8.6%. As was the case with earlier data, the number of inactive individuals that would potentially be participating in the labor force (i.e. inactive individuals who would take a job upon an offer) continues to accelerate hinting that the unemployment rate rise could sharpen further ahead. We expect an increase from the 7.2% average unemployment rate recorded last year to 9.0% this year. ** Full story here.

Tomorrow’s Agenda: The central bank publishes its flagship monetary policy report (IPoM) in which it will likely signal significant monetary stimulus is required going forward as the Chilean economy navigates its way out of the coronavirus shock. The Central Bank will also publish February’s GDP proxy (Imacec). Given February was prior to the coronavirus shutdown measures in March, we expect the recovery to continue with growth of 3.3% YoY (0.1% MoM). However, with the global expansion of COVID-19 and the resulting measures undertaken, the recovery will be short-lived.


The February national unemployment rate increased 0.4pp over twelve months to reach 12.2%, despite the urban rate falling by nearly a full percentage point. The urban unemployment rate came in at 11.5% in February, below the market consensus and our 11.7% call, as job growth remained upbeat at 2.5% (2.8% in January; 0.3% in 2019). In the quarter ending in February, the total unemployment rate was 11.5%, up 0.1pp over twelve months, notwithstanding the urban unemployment rate edged down 0.6pp to 11.6%. The labor market developments in urban zones is in line with a preceding period of activity recovery and elevated business confidence levels. However, the signs of a labor market improvement would likely be countered by the expected activity slowdown due to the coronavirus outbreak and oil price collapse. The significant shock expected to hit activity this year would likely lead to some labor market loosening from the 10.5% unemployment rate recorded last year. We expect activity to contract 0.4%, from the near potential 3.3% posted in 2019, amid low oil prices, weakened global demand and the domestic mitigating measures that would dampen internal demand. ** Full story here.


The unemployment rate came at 11.6%, in line with market expectations and our call (both 11.6%). Seasonally-adjusted, the unemployment rate remained at 11.5% (our estimates). The breakdown shows that the stability in the unemployment rate in February was the result of a 0.1% mom/sa increase in both labor force and employment. The underemployment rate reached 23.5% (stable at 23.5% seasonally-adjusted). The real wage bill grew 1.9% yoy (remained stable in seasonally-adjusted terms) as a result mainly of the increase in the employment (+2.0% yoy). Full story here.

The consolidated public sector posted a primary deficit of BRL 20.9 billion in February, printing close to our forecast (BRL 21.2 billion) and market consensus (BRL 21.5 billion). The central government registered a deficit of BRL 25.9 billion under the National Treasury’s methodology (which considers the gap between revenues and expenses), close to our BRL 26.8 billion estimate. Regional governments posted a surplus of BRL 5.2 billion, while state-owned companies showed a surplus of BRL 0.7 billion. The consolidated primary deficit over 12 months remained at 0.7% of GDP. The general government’s gross debt increased to 76.5% of GDP in February from 76.1% in January, while net debt narrowed to 53.5% of GDP from 54.1%, reflecting BRL depreciation during the month. Over 12 months, the nominal deficit excluding swap transactions slid to 5.5% of GDP from 5.6%. 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 can resume from 2021 onwards. ** Full story here.

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 5717 (4579 yesterday) confirmed coronavirus cases, with 201 (159 yesterday) confirmed deaths.

Tomorrow’s Agenda: February’s Industrial production will be released at 9:00 AM (SP time). We forecast a 0.4% decline mom/sa, with widespread negative figures within the manufacturing sector. Also, March’s trade balance will be released at 3:00 PM (SP time). We expect a USD 3.5 billion surplus, below the USD 4.6 billion registered in the same period last year. Over 12 months, we expect the trade surplus to recede to USD 42 billion (from USD 43 billion). Both exports and imports are expected to decline in the month, (-4.7% and -1.7%, respectively) already reflecting the fall in global trade due to the coronavirus outbreak.


The EMAE (official monthly GDP proxy) fell by 1.8% yoy, slightly below market expectations of -1.7%. On a sequential basis, the index decreased by 0.1% mom (+0.4% in December), taking the quarter-over-quarter contraction to 4.8% annualized (from -3.9% in 4Q19). Construction led the downturn with a drop of 10.1% in the quarter ended in January, from -8.3% in 4Q19. Manufacturing fell by 1.9% in the period (from -2.1% in the last quarter of 2019) and Services contracted by 0.7% yoy (from -0.8% in 4Q19), hit by lower real earnings. Agriculture, Mining and Fishing retreated by 1.1% yoy in the quarter ended in January, from +0.6% in 4Q19. We forecast a GDP contraction of 4.4% for 2020, due to the negative effects of measures to control the outbreak of the COVID-19 pandemic. We expect a severe contraction in 1H20, followed by a normalization of output in the second half of the year. ** Full story here.


The statistics institute (INEI) will announce March’s CPI inflation, for which we expect to come at 0.79% month-over-month. The monthly inflation figure will reflect an increase in education prices (due to the start of the school year) and some upward pressure on food prices associated to the coronavirus outbreak. Assuming our forecast is correct, annual headline inflation would post a growth rate of 1.97% year-over-year in March (from 1.90% in February).

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