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Citi Say No Room Yet To Indicate A Rate Cut

BRAZIL
  • Since the last Copom meeting, inflation expectations declined for all horizons. Meanwhile, the exchange rate has appreciated amid roughly stable commodity prices. In addition, May’s CPI inflation came in below Copom’s estimate (0.23% MoM against 0.33%).
  • All in all, Citi expect Copom’s inflation forecasts to drop to 5.0% and to 3.3% for 2023/24 yearends, below the previous estimates (5.8% and 3.6%), though still above the mid-point targets (3.25% and 3.0%). Lower inflation estimates will give the Copom comfort to de-escalate the hawkish tone in the statement, motivating the removal of the sentence that Copom "will not hesitate in resuming the tightening cycle in case the disinflationary process does not evolve as expected”.
  • However, considering the still higher-than-midpoint-target estimates, Citi believe there is no room yet to indicate a rate cut in the near term. Thus, Citi believe Copom will keep the sentence that “(…) will remain vigilant, assessing whether the strategy of maintaining the interest rate for a prolonged period will ensure the inflation convergence”.
  • Looking ahead, the improvement of inflation and the beginning of the re-anchoring process of expectations (especially after S&P's decision to upgrade the Brazil sovereign outlook to positive) will allow Copom to initiate the interest rate cutting cycle in Sep23 (50bps cut), with yearend Selic at 11.75%.
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