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Citi on BCB: Inflation Should Stay Above Target Until 2022 Year-End

BRAZIL
  • Citi Economics updated its policy expectations for Wednesday's BCB meeting (October 27), calling for a 150bp increase in the Selic rate vs 100bp prior expectation.
  • Economists point to the ongoing congressional negotiations around fiscal policy easing amid a more challenging global outlook as sources for an accelerated policy rate decision from Copom this week.
  • The easier fiscal policy suggests that inflation should stay above target until 2022 year-end, and combined with the government's recent decision to make room for additional public spending of around BRL90billion (0.9% of GDP), inflationary pressures are likely to rise further and reign for longer than expected.
  • This brings their economists in line with their trader's expectations for the BCB this week. The trading desk notes that a relatively modest hike (100-125bps) should be seen as dovish and ought to worsen the vicious cycle of weaker currency/steeper rates/damaged sentiment.
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