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Barclays Not Expecting BCB To Explicitly Close Door On Further Hikes

BRAZIL
  • In Brazil, after three months of upside surprises, IPCA inflation came in below consensus in May, decelerating to 0.47% m/m, from 1.06% m/m in April effectively confirming that the peak of annual inflation was left behind as the headline slowed marginally to 11.73% y/y, from 12.13% y/y in April.
  • While Congress continues to debate measures that could significantly reduce headline inflation in 2022 (a combination of temporary cuts in federal taxes on gasoline and ethanol prices and a possibly permanent reduction in state taxes on some particular items), the risk for another increase in fuel prices by Petrobras has not disappeared, particularly as domestic gasoline prices remain 30% below external parity.
  • Barclays IPCA forecasts of 8.8% for 2022 and 4.4% for 2023 do not yet incorporate possible changes stemming from the legislation under discussion, but reductions in 2022 would be partially offset by upward revisions in 2023.
  • Headline uncertainties aside, Barclays believe the BCB’s main focus remains on persistently high core inflation (which Barclays see peaking toward July), and they expect the Copom to hike the Selic rate 50bp this Wednesday, to 13.25%.
  • While Barclays believe this could be the last increase in rates this year, they do not expect the BCB to explicitly close the door on further adjustments just yet, cognizant of upside risks coming from still-rising inflation expectations for 2023.
  • In any case, as the relevant horizon for monetary policy will begin including 2024 in August, Barclays think the BCB may see reasons to interrupt the cycle on that occasion in order to observe the transmission of earlier tightening into the economy and prices in the coming months, also to avoid the risk of undershooting the 2024 target (as is likely to be suggested in the quarterly inflation report later this month).
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