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Itaú On Monetary Policy: No Rate Cuts In The Near Term

LATAM
  • With interest rates peaking in DM, China’s economy surprising positively, and the most recent banking stress generating no scarcity of U.S.-dollar funding, LatAm currencies have performed well recently. Of note, Itaú now expect stronger currencies in Mexico and Chile (two countries with strong fundamentals and facing less uncertainty over domestic policy direction) relative to their previous scenarios.
  • Still, even in Mexico and Chile, their year-end exchange-rate forecasts imply some weakening from current levels, as the global economy (including China) loses momentum and high inflation in the U.S. may still lead to some USD and Fed Fund Rate repricing. Policy rates are also peaking in the region.
  • For monetary policy: Itaú’s baseline is one additional hike in Mexico and unchanged rates in Colombia. However, core inflation dynamics have been uncomfortable everywhere, so rate cuts in the near term are unlikely. In Chile, arguably the country in the region where policy stance – measured as the difference between short-term real rates and estimated neutral rates – is tighter, BCCh communication has frustrated market expectations of a cut as soon as May. Itaú now see rate cuts starting only in 3Q23 (from June) and have increased their year-end rate forecast to 9.25% (from 8% in previous scenario).
  • For Colombia and Brazil, they continue to see rate cuts only in 4Q23, and they have increased their year-end policy-rate forecast in Colombia to 12%, from 11.5%. In Mexico and Peru, central banks are more sensitive to the Fed, and Itaú see no rate cuts this year.
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