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Citi Say Larger 50bp Cut Could Be Counterproductive For Expectations

BRAZIL
  • The choice of a “parsimonious” rate cut of 25bp would be a compromise among a split board, also given that some members may still see the recent improvement in inflation expectations (currently still 50bp above the centre of the 3.0% target for 2025-27) as insufficient to consider them anchored.
  • While the difference between a 25bp and 50bp cut alone would not significantly alter the path of monetary policy at this stage (considering there is room for the Selic rate to eventually return to single digits next year, as suggested by the BCB’s own models and forecasts), Citi believe the signalling associated with a larger cut of 50bp could be counterproductive in fostering additional re-anchoring of long-term inflation expectations toward the 3% target, possibly also leading to market expectations of more aggressive/front-loaded cuts ahead.
  • In paragraph 18 of the minutes, the board unanimously warned that “premature flexibilization could lead to a reacceleration of the inflationary process and, consequently, to a reversal of the monetary easing process itself,” also “negatively impact[ing] not only the credibility of monetary policy, but also the financial conditions.”
  • If Citi’s forecast of a 25bp cut proves incorrect, they believe a 50bp cut would likely come from a split vote. Their expectation for cuts of 50bp per meeting from September onward (toward 9.5% by Q3 24) is predicated on continued improvement in short-term inflation dynamics and long-term inflation expectations, keeping in mind that 2025 will enter the Copom’s relevant horizon for monetary policy in its next meeting and gain increasing weight as time progresses.
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