LatAm Weekly – March 29

Mexico – A Neutral Banxico On Thursday, March 28, Banxico left the policy rate unchanged at 8.25% as widely expected. In our view the communique was remarkably neutral. Banxico said that the risks to inflation remain high relative to its forecast –amidst existing economic and market uncertainties. The risks to growth have continued to deteriorate since Banxico’s previous meeting—suggesting that new impediments to growth have emerged. We maintain the position that Banxico will cut 75bps starting in August or September arriving at 7.50% by December 2019, and will take the policy rate to 6.50% by yearend 2020. Brazil – BCB’s Quarterly Inflation Report The release of the BCB’s Quarterly Inflation Report reaffirms the signals given in the minutes and the communique: symmetric risks to inflation, and expressed caution about future monetary policy that should prevent financial markets from pricing-in rate cuts. The report also stresses the importance of pension reform passage amongst others currently under review in the lower house of congress. Unsurprisingly, the BCB report also lowered its 2019 GDP forecast to 2.0% YoY from 2.4% a quarter ago. Natixis has also lowered its forecast to 2.2% YoY (from 2.5%). Brazil – Politics Impacting ” Previdencia ” This week has been characterized by politics interfering with the discussion of the pension reform in congress. However, this political tumult has receded. There were reports that the tense Bolsonaro and Maia relationship had improved to the point that both were seeking a ‘truce’ with the purpose of approving the pension reform. Maia would let the administration appoint a rapporteur for the reform. Also, Finance-Minister Paulo Guedes not only met with Maia, but allegedly assumed leadership over the congressional negotiation of the pension reform. Apparently the number of congressional members that had switched to an opposing position over the pension reform was minimal. As a result, the most likely outcome is for congress to approve the pension reform. However, the road to approval could be bumpy. Argentina - New Measures aim at trying to help reduce dollar demand The central bank of Argentina (BCRA) announced a measure to limit the position that banks can have in leliq -instruments. The objective of the measures is to reduce the spread between Leliq and Badlar (used for deposits). The ultimate goal is that deposit rates increase and Argentinians demand less dollars. Our intuition is that despite the recent rate hikes, deposit rates were not really responding. Therefore the recent measure should help in transmitting the tightening of monetary policy into deposit rates so it can effectively reduce demand for dollars.