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BRAZIL: Itaú Acknowledge Better Breakdown of Inflation Data than Anticipated

BRAZIL
  • The headline IPCA-15 reading for August was in line with Itaú’s expectations, with a slightly better breakdown than anticipated. This was primarily due to a monthly deceleration in underlying services, including a payback of the services for vehicles component following a sharp increase in the previous month, and a lower-than-expected print of labour-related services.
  • From Itaú’s latest macro scenario for Brazil, they maintain their forecast for the Selic rate at 10.50%pa until the end of 2025, for now, while noting the leeway is decreasing and risk tilted towards to the upside.
  • Simulating the model used by the Copom, Itaú said that with the exchange rate at 5.70, they find an inflation projection of 3.3% in the relevant horizon, above the target. In this case, according to our estimates, the interest rate level required to bring the IPCA back to the target would be at least 11.50% pa.
  • In other words, if the exchange rate were to revert back to the recent highs, the interest rate should be raised later this year.
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