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BCB To Likely Signal Reduced Pace Of Tightening In March

  • BCB likely to raise Selic rate by 150bp this week and signal reduced pace of tightening in March.
  • As the mid-January IPCA-15 release shows (10.20% yoy), inflation moderation will follow an uncertain trajectory in the near term before it subsides more substantially in 2H21, assuming the supply situation eases. SG’s end-2022 and end-2023 inflation forecasts are 4.82% yoy and 3.55%, respectively, compared with consensus (BCB Focus Survey) forecasts of 5.15% and 3.40%.
  • With the Selic rate finally set to exceed inflation and real rates turning positive, SocGen’s focus will be on the BCB’s communication rather than on rate hikes.
  • The economy has been in recession for the past three quarters and given the risks to the level of activity in 1Q22 (due to the low base and the third wave of the pandemic), it faces the prospect of very weak growth in 2022. The product and the labour market slacks are steep and are likely to widen further in 2022. The state of the economy adds pressure on the BCB to not yet commit to another strong rate hike in its forward guidance.
  • In SocGen’s baseline scenario, they expect the BCB to conclude its tightening cycle with a final 100bp hike (taking the terminal Selic rate to 11.75%) in March. However, they believe it makes sense for the BCB to not commit to a March decision at this stage.
  • Consensus obtained from the BCB’s Focus Survey expects the year-end Selic rate at 11.75% while SG expect it at 10.75%. As both they and consensus expect inflation to decline to close to 5.0%, such a steep real rate (which would be above 6.5% as per consensus estimate) makes little sense when the economy is operating well below its potential and also when inflation is seen moderating in 2023. However, SocGen believe that the risks to their end-2022 rate forecast are largely balanced at this stage. They continue to expect 300bps of rate cuts in 2023.

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