LatAm Weekly – June 24-28 (1/2)

Chile - Minutes signal 50bp cut The central bank of Chile ( BCCh ) published its June 7thminutes where it made the surprise move of cutting the policy rate 50bps. The minutes make clear the BCCh intention of signaling that no additional cuts were needed. Any further cut would require a change in the trend of inflation or a weakening of economic activity. Judging by the 1-month forward rate, financial markets are pricing-in 40bps of cuts for the coming 12-months. But, we believe the market’s assessment is mostly linked to the global slowdown—it is not related to BCCh’s signaling. In our view, BCCh’s minutes states an intention to cut 50bp but signal neutrality. Brazil – Minutes and Quarterly Inflation Report open door to rate cuts...if the Lower House approves the Pension Reform We assign a high probability of a BCB cutting cycle following the Brazilian lower house passing the pension reform. This means that the BCB will cut the Selic rate in September or October. The combination of a lower neutral rate (due to the passage of reforms), and the widening of the output gap, pushes the policy rate to 5.75 – 6.00 % according to our augmented Taylor rule model. However, given the existing information, it is difficult to assess how the BCB will proceed in terms of easing its policy rate. Will the BCB cut the policy rate by 50bps in one meeting and then evaluate future changes or will it cut 25bps and thereafter initiate a cycle? As of now, it is unclear. Brazil – Benign inflation dynamics The release of the June IPCA-15 warrants an in-depth look at Brazilian inflation. The June IPCA-15 for June came to 3.84% YoY, which is the lowest annual rate since February and lowest monthly rate since June 2006 . In June, food & beverage prices decreased Inflation pressures that were once rising in the second quarter, are now, subsiding. Core inflation accelerated from 3.0% YoY in January to 3.6 %YoY in May but has since started to stabilize. Also, the diffusion index fell in May to below 50% for the first time since August 2017. This indicates that the process of deceleration is broad-based and not just one or two culprits.