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BRAZIL: HSBC Forecast 125BP Hiking Cycle Starting in September

BRAZIL
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  • HSBC are now forecasting a 125BP hiking cycle in Brazil, starting with a 50BP hike in September and followed by 50bp and 25bp hikes in Nov and Dec respectively. HSBC think the central bank will opt to frontload its hikes as a means to assert its commitment to monetary stability and ultimately deliver fewer hikes, bringing the Selic rate to 11.75% by end-2024. 
  • Several members of the Copom have come forward to deliver a hawkish message in recent weeks, and HSBC believe rhetoric from the likely new governor Galipolo has been noteworthy. HSBC think the Copom sees de-anchored inflation expectations as a major challenge to the credibility of the inflation targeting regime and thus overall monetary stability, and requires swift action.
  • The decision to tighten policy and frontload the cycle should be seen in the context of the upcoming transition of the board. A coherent and unified hawkish message, crucially coming from the likely next governor, should help dispel concerns of political influence on the board's future decisions.
  • HSBC think the BRL will react positively to the hiking cycle, which should help offset lingering fiscal uncertainty surrounding the 2024 and 2025 budgets. HSBC see USDBRL falling to 5.35 by the end of Q3, supported by decisive tightening from the central bank and continued upward revisions to market growth expectations. HSBC see the BCB delivering 175bp of rate cuts starting in 3Q25, bringing the rate to 10.00% by end-2025.
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  • HSBC are now forecasting a 125BP hiking cycle in Brazil, starting with a 50BP hike in September and followed by 50bp and 25bp hikes in Nov and Dec respectively. HSBC think the central bank will opt to frontload its hikes as a means to assert its commitment to monetary stability and ultimately deliver fewer hikes, bringing the Selic rate to 11.75% by end-2024. 
  • Several members of the Copom have come forward to deliver a hawkish message in recent weeks, and HSBC believe rhetoric from the likely new governor Galipolo has been noteworthy. HSBC think the Copom sees de-anchored inflation expectations as a major challenge to the credibility of the inflation targeting regime and thus overall monetary stability, and requires swift action.
  • The decision to tighten policy and frontload the cycle should be seen in the context of the upcoming transition of the board. A coherent and unified hawkish message, crucially coming from the likely next governor, should help dispel concerns of political influence on the board's future decisions.
  • HSBC think the BRL will react positively to the hiking cycle, which should help offset lingering fiscal uncertainty surrounding the 2024 and 2025 budgets. HSBC see USDBRL falling to 5.35 by the end of Q3, supported by decisive tightening from the central bank and continued upward revisions to market growth expectations. HSBC see the BCB delivering 175bp of rate cuts starting in 3Q25, bringing the rate to 10.00% by end-2025.