Colombia—The Central Bank Slashed the On Lending rate by 100bps to 8%
Last Friday, the central bank committee surprised analysts and cut the ON lending rate by 100bps to 8%. We, as well as the consensus, were expecting the committee to lower rates by at least 50bps. In the communiqué, the CB highlighted that inflation has been declining for the past three consecutive months to 7.18% y/y by Jan. 09, mainly due to lower food inflation. Moreover, core inflation improved at the beginning of 2009 and inflation expectations fell within the central bank target range of 4.5% to 5.5%. According to the CB, the descending inflation path and improving inflation expectations reflect the fact that domestic and external demands are weak and commodity prices are low. Therefore, the board is now more certain that inflation will continue falling in the upcoming months and it will be within the target range by the end of 2009.
In terms of domestic growth, the CB mentioned that new information confirms that economic activity is slowing down, in particular commerce and industry. In fact, and we agreed with this view, the global deceleration (via lower export revenues and worsening of the terms of trade), together with waning domestic confidence, and more expensive capital flows, are taking their toll on the domestic economic activity.
Therefore, according to the CB board, the aforementioned conditions allow it to lower rates more speedily than in the last two sessions; however, it does not mean that similar reductions might take place in the future. In this context, monetary policy and the weakening of the local currency support domestic demand and economic activity—as long as it does not compromise achieving the inflation target.
Finally, the board indicated that it will continue monitoring carefully the international environment, along with inflation and growth behavior and expectations, and it reiterated that future monetary policy decisions will depend on new information.
Overall, we concur with the CB decision to lower rates aggressively as we see inflation and inflation expectations trending down and the economy deteriorating in the upcoming months. We believe external factors (e.g. elevated risk aversion) are the main forces behind high volatility in the COP. By lowering rates aggressively, the Colombian central bank is showing policy flexibility and pragmatism when dealing with the global crisis. It also indicates that Colombia is not falling behind the curve in easing external recessionary forces and is preparing the local economy to improve quickly once conditions permits. Finally, the communiqué signals more rate cuts to come, of which the pace and size will depend on upcoming data. We maintain our view that the CB will lower the ON lending rate to neutrality levels of around 7% to 6.5% by mid-year. The rates might go even lower if growth conditions deteriorate swiftly and/or inflation expectations improve significantly.
In other data releases DANE reported that industrial production (-9.2% y/y) and real retail sales (-3.4% y/y) continued contracting in Dec. 08, while labor dynamics worsened sharply in Jan. 09 (unemployment up to 14.9% from 11.9% in Dec. 08). These figures reinforced the CB action and highlight the fact that given the ongoing deterioration in the global economic and financial outlooks, more needs to be done in terms of monetary policy.
MEXICO—Domestic Confidences likely Stayed on the Ropes in February
The most important data this week will likely reinforce our view that domestic consumption and investment prospects continued deteriorating at the beginning of 2009. Indeed, consumer confidence (Feb. 09) likely remained in a bad shape, given the ongoing deterioration in economic growth dynamics and the stubbornly elevated inflation. Moreover, IMEF manufacturing and non-manufacturing indexes (Feb. 09), a gauge for business confidence, will likely continue printing poor results, driven by worsening prospects for the local and US economies, as well as tighter financing conditions. IMEF data will be released on Tuesday March 3rd. Finally, other relevant releases on Monday will be the fiscal accounts (Jan. 09), where emphasis should be placed on higher spending (counter-cyclical fiscal policy); Banxico’s monthly survey on economic expectations (Feb. 09), which will likely show a further deterioration in growth and FX expectations, but also a stable inflation and rates forecast by year-end; and remittances (Jan. 09), which should continue falling given the worsening conditions in the US. The latter have negative implications for the current account dynamics, especially since export revenues are declining sharply, and to a lesser extend, they also affect consumption.
On Thursday March 5th, INEGI will report on the Consumer Confidence Index (CCI), which will likely post a decline of 21% y/y to 79.8. In our view, the deepening of the US and local recessions is deteriorating labor dynamics significantly and should have continued weighting on consumer confidence. This, together with tighter credit conditions and lower disposable income (elevated inflation), post limitations to consumer spending, especially on large ticket items (automobiles, house appliances and housing), therefore, keeping private consumption (70% of the GDP) under stress during the 1Q09. The Bloomberg consensus anticipates CCI to print a level of 80.
Chile–Improving Inflation (Feb. 09) and Worsening Economic Activity (Jan. 09) will likely increase the chances for another aggressive cut in the March 12th meeting. CB Minutes
This week’s data will likely continue pointing to falling prices and weakening economic activity at the beginning of 2009. Of importance, the CB will release on Thursday March 5th the minutes from the February 12th monetary policy meeting, when it slashed rates by 250bps to 4.75%. The minutes will provide more light about the magnitude and schedule of the easing cycle in the upcoming meeting. In our view, the current growth and inflation dynamics provide the CB with enough room to act aggressively again, allowing them to cut the MPR by at least 100bps in the March 12th meeting.
On Thursday March 5th, INE will disclose inflation data for Feb. 09. We expect prices to continue showing a normalization trend driven by the low international prices of commodities, as well as by slow domestic demand, seasonal factors and a stable-strong currency, all this despite the increases in the prices of liquefy gas and gasoline. In fact, we anticipate headline inflation to have declined by 0.2% m/m (+0.4% m/m in Feb. 08 and -0.76% m/m in Jan. 09) and core CPI to have stayed flat (0.9% m/m in Feb. 08 and -0.18% m/m in Jan. 09). This would bring headline and core inflation to readings of 5.68% y/y (6.32% y/y in Jan. 09) and 7% y/y (8% y/y in Jan. 09), respectively. Although both are well above the central bank target of 3%, they are signaling a rapid normalization pattern, which, together with a swift widening of the output gap, should provide comfort to the CB board to continue lowering rates aggressively. The Bloomberg consensus expects headline and core CPI to each register -0.1% m/m in Feb. 09.
Moreover, on Thursday, the central bank will report on economic activity (IMACEC) for Jan. 09, which will likely print a sharp contraction of 1.6% y/y. This will be the first annual contraction since March 02. Overall, the global economic and financial crisis took its toll on the external sector in January, whilst waning domestic confidence and a negative calendar effect (Jan. 09 had one business day less than Jan. 08) exacerbated downside pressures on economic activity. Indeed, total trade (exports plus imports) collapsed (-35% y/y) and the industrial output contracted sharply (-8.9% y/y). Moreover, unemployment for the Nov. 08 to Jan. 09 period worsened (8%), mining output stayed in negative territory (-3.6% y/y), and electricity generation declined rapidly (-1.2% y/y). Consumer spending indicators were positively impacted by a larger sample in the case of real supermarket sales (5% y/y), and seasonal sales (apparel) in the case of retail sales (1.2% y/y). Our view is that strong downward pressures on economic activity will stay in place during the first part of the year, and then improve by year-end thanks to an aggressive countercyclical macroeconomic policy and some improvement on the external front. The Bloomberg consensus expects economic activity to contract by 0.7% y/y in Jan. 09.
COLOMBIA—Inflation likely continued Improving in Feb. 09
On Thursday February 5th, DANE will release inflation data for February, which will probably show that headline inflation increased by 0.74% m/m (1.39% m/m in Feb. 08 and 0.59% m/m in Jan. 09) and core (ex-food) CPI went up by 0.57% m/m (0.75% m/m in Feb. 08 and 0.38% m/m in Jan. 09). This means that headline and core (ex-food) inflation should stand at 6.22% y/y (6.91% y/y in Jan. 09) and 4.75% y/y (4.94% y/y in Jan. 09), respectively; of which only the headline number will be above the central bank target range of 5% (+- 0.5%) for 2009. Overall, favorable supply side conditions (e.g. low international prices of food and fuel) should have compensated for a sharp weakening of the currency. Moreover, rapidly slowing domestic demand, favorable weather conditions (food), and other seasonal factors (apparel sales) should have helped inflation in February, despite upward pressures on education (back-to-school season). This benign inflation path should be conducive to further easing of monetary conditions in the upcoming meetings (please see note above on Colombia’s central bank decision). The Bloomberg consensus expects inflation to be about 0.81% m/m in Feb. 09.
Peru—We expect the CB to Lower the Reference Rate by 50bps to 5.75%
On Thursday March 5th, the central bank monetary policy board will decide on the reference rate, and we anticipate the committee to lower rates by at least 50bps to 5.75%. The inflation reading for Feb. 09 posted a decline of -0.07% m/m, which was below our expectation (-0.03% m/m) and that of the consensus (+0.11% m/m), thus, indicating that prices continue in a normalization pattern (5.49% y/y in Feb. 09 vs. 6.53% y/y in Jan. 09). Moreover, the inflation print in Feb. 09 should improve inflation expectations moving forward, and bode well with our view that headline inflation will likely be around 2.6% y/y by year-end. Finally, the external shock and a high statistical base are already exerting downward pressure on economic activity, which in turn should continue easing demand pull pressures. A relatively stable currency should also favor an aggressive cut in March 09. Overall, we now anticipate the CB to bring the reference rate to 4.5% or 4% by mid-year 2009, rather than by year-end. The Bloomberg consensus expects the CB to lower rates by 25bps to 6%.