LatAm Weekly – June 17-21 (2/2)

Brazil - Preparing to cut W hen describing the inflation risks, the BCB introduces a key word, new to their communication-strategy. The BCB described the risk of not approving the structural reforms [e.g., the pension reform] as “preponderant.” This refers to the dominant influence these political developments will have over the possibility of rate cuts. Approval will allow for the central bank to cut rates. In consequence, the BCB will likely wait for the lower house to approve the pension reform, thereafter triggering rate cuts. This means that BCB could cut its policy rate by September or October. The magnitude by which the central bank will cut is still uncertain. In fact, it is equally likely that the BCB does not yet know. But in general, if the BCB is cautious and cuts by 25bps, it would signal the start of a cutting cycle. A 50 or 75bp cut likely signals just a one-off cut. Colombia – BanRep breathes a sigh of relief Core inflation has been consistently slowing, and also it seems to be stabilizing below 3.30% YoY—close to the 3.0% target, and economic growth is decelerating. Our current 2019 GDP forecast stands at 3.3% YoY, but we acknowledge that there are risks to the downside. We have decided to change our monetary policy forecast to 4.25% through 2020 from expecting hikes. This was altered given the likely rate cut by the US Fed, the economic deceleration in Colombia and benign inflation dynamics. Mexico – Banxico , Trump, Heath, and the US Fed The central factor prohibiting Banxico from cutting rates is that inflation remains above the upper target bound (4% YoY). For Banxico to start cutting, inflation must dip below 4.0% and also converge upon the 3% point-target. In our view, all other considerations are secondary when deciding to cut or not. Banxico is worried that a premature rate cut could increase inflation-expectations, in our view. So far this year, inflation expectations have increased marginally, despite the hawkish rhetoric. Board member Jonathan Heath has argued that the Trump tariff-threats would disallow Banxico from beginning an easing cycle. Heath is concerned that Trump’s tariff-threats could pressure the MXN and therefore inflation, in our view. However, the US Fed is getting ready to cut rates and this has caused LatAm currencies, including the MXN, to appreciate. Could it be that the impact of the US Fed cuts overpowers the effects of the tariff-threats on the MXN path? If the MXN continues to trade around the 19.00 level, it should allow Banxico to consider rate cuts, despite Trump’s threats.