Itaú BBA - Peruvian central bank cuts rates by 100bps in extraordinary meeting

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Peruvian central bank cuts rates by 100bps in extraordinary meeting

Abril 13, 2020

We expect the BCRP to keep its policy rate at 0.25% throughout 2020

Talk of the Day 
 

Peru

Last Friday, in an extraordinary meeting, the Central Bank of Peru (BCRP) decided to cut its policy rate by 100-bps (to 0.25%, from 1.25%). In the decision, the board took into account the temporary negative supply and demand shock to the economy associated to the coronavirus outbreak, increased downside risk to economic activity, including the possibility of a global recession during the first half of the year and downside risk to inflation. The board expects inflation to approximate the lower bound of the central bank inflation target range (2% +/- 1%) due to a substantial deterioration of internal demand. The BCRP introduced the possibility of using unconventional monetary policy to ease further its policy stance. While the BCRP didn’t mention the possibility of cutting further the policy rate, they will continue to monitor inflation and its determinants to relax further the monetary policy stance using different methods.

We expect the BCRP to keep its policy rate at 0.25% throughout 2020. The widening of slack conditions and downside risks to inflation, support the BCRP keeping a very expansive monetary policy stance. Should the economic outlook deteriorate further, the BCRP will likely use unconventional monetary policy to ease further financial conditions.

Brazil

The consumer price index IPCA increased 0.07% in March, printing somewhat below our forecast (0.10%) and the median of market expectations (0.12%). Auto fuels (-1.9%) and airfares (-16.8%) showed noteworthy declines. Importantly, this report incorporates some data gathered in non-face-to-face meetings (websites, phone calls or e-mail). Core inflation measures remain at comfortable levels. Underlying service inflation went up slightly by 0.13%, pushing the year-over-year change down to 3.3% (from 3.4%). Underlying inflation in industrial goods rose 0.08% during the month while its year-over-year change receded to 1.8% from 2.0%. The average of year-over-year core inflation measures remains around 3%. Going forward, upcoming IPCA readings tend to remain low. According to our forecasts, the IPCA will increase 0.09% in April, show a 0.20% deflation in May and go up 0.09% in June. For the whole year readings, we anticipate increases of 2.7% this year and 3.3% in 2021. ** Full story here.

Traffic of heavy vehicles (ABCR) dropped 4.6% mom/sa (+3.1% yoy) in March (our seasonal adjustment). The 3-month moving average declined 0.8%. This result points to a sharp decline in the industrial production for March. The report published by ABCR states that these figures consider only the first 10 days of lockdown, thus, the next readings are set to deteriorate further.

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 22,169 confirmed cases (up by 1442, from 20,727 yesterday), with 1223 confirmed deaths (up by 99, from 1124 yesterday).

Colombia

Last Friday, authorities requested extension of Flexible Credit Line (FCL) for some USD 10.8 billion to the IMF Board. The request does not imply a formal disbursement of funding, just a renewal of the FCL Colombia first obtained in 2009 for a similar dollar amount, and that was last renewed in 2018 for two years. The request is equivalent to around 4% of GDP. In September 2018, the central bank embarked on a dollar accumulation program, until May 2019, in preparation for a possible cut to its credit line with the IMF. The FCL is part of the IMF’s Rapid Financing Instruments (RFI) and was designed to meet the demand for crisis-prevention and crisis-mitigation lending for countries with very strong policy frameworks and track records in economic performance. This instrument was created as part of the process of reforming how the IMF lends money to countries that find themselves in a cash crunch, with the idea of tailoring its lending instruments to the diverse needs and circumstances of member countries. To date, three countries (Colombia, Mexico, and Poland) have used the FCL. While none of the three countries have so far withdrawn from these lines, the FCL has provided a valuable backstop for these countries and helped boost market confidence during the period of heightened risks.

Chile

Day Ahead: The central bank will publish the results from its monthly economist survey at 9:30 AM (SP time). Analysts are expected to lower inflation expectations to near 3% for 2020 (3.5% expected last month), report an activity contraction (+1.2% seen as of last month for this year) and signal stable rates at 0.5% for a significant period (seen at 1.5% for at least 11 months in the previous survey).

The Week Ahead in LatAm

Argentina

On Wednesday, the INDEC (the official statistical agency) will publish the National CPI for March. Elypsis consulting estimated a 2.3% month-over-month increase for consumer prices. If this estimation is correct, annual inflation will decelerate to 46.8%, from 50.3% in February.

Brazil

On economic activity, IBC-Br monthly activity index for February will be released on Tuesday. We forecast a 0.3% mom/sa increase, based mainly on the February’s results for industrial production (+0.5% mom/sa), broad retail sales (+0.7% mom/sa) and the service sector real revenue (-1.0% mom/sa). Paper cardboard dispatches (ABPO) for March, without a scheduled date, may also come out this week. Given the current scenario, data for March are more relevant than those for February, because they will provide signals on the initial impacts of the coronavirus pandemic on economic activity.

Chile

On Thursday, the central bank releases the minutes from the March 31 meeting at which the policy rate was lowered by 50bps to its technical low of 0.5%. The minutes, in line with the Inflation Report that was released the day after the meeting, will likely show that the expected sharp widening of the negative output gap justifies maximum stimulus for a prolonged period. Additionally, they will confirm that the options of cutting rates by 25bps and 50bps were discussed by the board.

Colombia

On Wednesday, activity indicators for the month of February will be released. Activity indicators for January retained similar dynamics to recent months, with robust consumption leading growth, while manufacturing surprised to the upside. Retail sales grew 7.5% yoy in January (7.1% in December), while manufacturing increased 3.7% yoy (3.2% in December). Low inflation, robust credit growth and persistent immigration flows have supported retail activity, despite low confidence, while recovering manufacturing is responding to solid domestic demand. For February, still before the economic shutdown, we expect retail sales to increase 7.2%, while manufacturing is set to grow 3.0%. 

The monthly coincident activity indicator (ISE) will be published for February at the close of the week. In January, activity dynamics remained upbeat with ISE growing 3.5% YoY (3.6% in December), boosted by retail. Still elevated retail sales in the month suggest another solid growth print (3.2% expectation). Looking further ahead, coronavirus and lower oil prices are significant headwinds likely leading to activity contraction.

Paraguay

The central bank will publish the monthly GDP proxy (IMAEP) for February on Tuesday. The IMAEP rose 4.5% yoy in January (0.3% mom/sa). Growth continued in the months before the full impact of the COVID-19 pandemic. We forecast a 5.8% year-over-year increase in February, helped by base effects due to the normalization of the soybean harvest after the drought registered last year. 

Peru

In the middle of the week, the statistics institute (INEI) will release February’s GDP proxy. We estimate the GDP proxy grew 3.3% YoY, from 3.0% in January. For the natural resource sectors, we expect a recovery in fishing output, reflected also in primary manufacturing, while mining output slowed down. On the non-natural resources side, we expect construction output improved (consistent with a recovery in public capital expenditure execution), while services sector moderated its growth pace. 



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