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BRAZIL: BBVA: Incoming IPCA & Expectations Data Critical To Determine Next Moves

BRAZIL
  • As BBVA had expected, the board wanted to give a hawkish signal of unity regarding their commitment to achieving convergence to target. Policymakers highlighted that the uncertain global scenario, resilient domestic activity, increased inflation projections and unanchored expectations require greater caution.
  • The board also stressed that credible fiscal policy contributes to the anchoring of inflation expectations, and that monetary policy should continue to be contractionary for “sufficient time” at a level that supports both the disinflation process and the re-anchoring of expectations near the target. 
  • The incoming inflation and inflation expectations data will now be critical to determine the Copom’s next moves. Notably, the Copom revised its inflation forecasts upward (4.0% for 2024 vs. 3.8% previously, and 3.4% for 2025 vs. 3.3% before) despite the pricing of hikes later this year and an assumption of USDBRL5.30.
  • This suggests the door is open for alternatives and that the BCB would prefer a stronger BRL. An extended pause into 2025 is now the more likely scenario, in BBVA’s view. The hawkish BCB decision was priced, but should still help the BRL as long as it achieves some yield stability. 
  • Overall, the BRL’s performance may depend on improved credibility and confidence helping to cool yield pressures.
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