The hawks are out
The Central Bank’s September Monetary Policy Report (IPOM) was surprisingly hawkish. It stated that the upward cycle would begin “in coming months,” implying in either mid-October or early December. The Bank’s base scenario is that the monetary policy interest rate will be between 4% and 4.5% during 2020. Even the Bank’s analysis of risks was hawkish.
There was an unusually strong upward correction of the GDP growth forecast for 2018, from a 3.25%-4% range in June’s report, to a 4%-5% range in September’s. The description of the main risks, the inflation forecast, the analysis of the labor market and the view of the exchange rate were also hawkish. July’s Monthly Index of Economic Activity (IMACEC) casts some doubt upon the Central Bank’s euphoria. Although the 3.3% y/y expansion exceeded analysts’ expectations (2.9% in the Bloomberg survey’s median forecast), there was a deceleration. A slowing growth rate will be a recurring theme for H2 2018.
The inflation forecast was also revised upward. Even though the Central Bank expects core inflation (CPI excluding foodstuffs and energy, IPCSAE) to remain below total inflation for the next year, it now forecasts 2.7% for December, up from June’s totally unrealistic 2.3%.
The Central Bank once was worried about sluggishness in employment, especially the lack of growth of private payroll jobs. Not anymore. July’s data was not especially good, though. The growth rate in employment dropped from 2.1% in the April-June quarter to 1.4% in the May-July quarter. But in the same period, payroll expansion slightly accelerated. The unemployment rate stood at 7.3% in the May-July moving quarter, up from 7.2% in the previous quarter. Wages continue to lag. Despite this poor performance, the IPOM very much downplays the extremely slow wage growth.
Economic uncertainty, inequality, social liberalization and crime are providing fertile ground for the emergence of a new kind of Latin American populist. Chilean far-right leader José Antonio Kast has emerged as the country's premier example; he is joining forces with people such as Brazilian presidential front-runner Jair Bolsonaro, in order to more powerfully push their vision of right-wing politics. As populists in other regions have shown, their hostility to institutions introduces additional investor uncertainty and risk.
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