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Citi: Expect Larger 125bp Hike, Following Sharp Rise In Inflation

BRAZIL
  • While consensus forecasts a 100bp Selic rate hike, Citi Economics expects a larger 125bp hike to 12.0%, following the sharp rise in inflation and inflation expectations. Citi traders agree that a 125bp hike is most likely, while markets are pricing ~109bps..
  • Latest survey results, combined with the most recent inflation data, leave Citi Economics increasingly more comfortable with its out of the consensus call. Looking ahead, the BCB will likely start decelerating rate hikes into yearned 2022, butt policy will remain contingent on inflation data and expectations, with upcoming IBGE CPI due March 25 and April 8.
  • A hawkish surprise should have a more material impact on rates than on FX, though BRL will inevitably take some guidance from moves in DI curves. Spreads may continue to widen ahead of the meeting, while BRL remains most vulnerable to commodities/energy price action.
  • Citi economists stay long BRLCOP in options, expecting BRL to continue benefiting from a higher carry on a faster-than-average hiking cycle relative to EM peers.
  • In the medium-term, other domestic and macro factors, such as residual effects of trucker protests, a possible increase to social spending in Auxilio Brasil, and upcoming presidential elections/polls, alongside broader inflationary pressures, will influence local markets.

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