According to the May Central Bank Survey of Expectations, analysts revised their inflation expectations markedly upward after the sharp weakening of the peso last month. The inflation expectation for 2018 jumped to 27.1%, from 22.0% in the April Survey, significantly above the 15% inflation target set by the central bank. Analysts expect a slow deceleration of inflation. The median core inflation expectation for 2018 rose to 25.1%, from 19.8% in the previous survey. Analysts also revised their inflation expectations for 2019 and 2020. The market expects inflation at 19% by December 2019 (from 15% before) and 14% by the end of 2020 (11% previously). The targets set by the central bank for those years are 10% and 5%, respectively.
Survey participants expect the monetary policy to start to decline in July, to 38% from the current level of 40%. According to the survey, the reference rate (7-day repo rate) will hit 30% by December this year and 23.25% by the end of 2019. The survey also shows that analysts expect a sharp deceleration of the economy. Pundits forecast GDP to grow 1.3% in 2018 and 2.2% in 2019 (down from 2.5% and 3.2% respectively in the previous survey).
We expect the central bank to stay put in its next monetary-policy-rate meetings given the challenging inflation scenario and instability in the exchange-rate market. The details of the stand-by arrangement currently under negotiation with the IMF are expected to be announced in the coming days. The size of the credit line and the fiscal and monetary targets are the key variables to monitor.
Tomorrow’s Agenda: The car-makers association (ADEFA) will release May data on production, exports and domestic sales to car dealers throughout the day. We expect some deterioration in car output in the coming months due to lower domestic sales (affected by the depreciation of the peso and higher interest rates) and lower exports to Brazil.
According to the Focus survey, median GDP growth expectations for 2018 declined 19 bps to 2.18%, and did not change for 2019 and 2020 (at 3.00% and 2.50%, respectively). IPCA inflation expectations increased for 2018 to 3.65% (from 3.60%). For 2019, inflation expectations increased 1bp to 4.01% and remained flat at 4.00% for 2020. Median forecasts for the exchange rate depreciated slightly to BRL 3.50/USD for 2018 (from 3.48), to 3.50 for 2019 (from 3.47) and to 3.54 for 2020 (from 3.51).
Tomorrow’s Agenda: April’s industrial production will be released at 9:00 AM (SP Time). We forecast a 0.7% mom/sa increase, (consensus: 0.5% mom/sa), which would lead to an 8.9% yoy increase (consensus: 7.9% yoy). The Central Bank announced another FX swap rollover auction of up to 15,000 contracts.
Tomorrow’s Agenda: The central bank will publish the GDP proxy (Imacec) for the month of April at 9:30 AM (SP Time). We and the consensus forecast Imacec to gain 0.2% from March and result in annual growth of 6.2% (consensus: 5.5%).
Tomorrow’s Agenda: The National Institute of Statistics will release inflation for May at 9:00 PM (SP Time). We expect consumer prices to gain 0.30% from April (consensus: 0.27%), taking annual inflation to 3.20% (consensus: 3.19%).