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COPOM PREVIEW - Fiscal Concern May Prompt Hawkish Tweak To Forward Guidance

BCB

MNI POV: Fiscal Concern May Prompt Hawkish Tweak To Forward Guidance

  • Announcement expected after 2130GMT/1830 Local

Fiscal: The last minutes release highlighted that 'changes in the fiscal policy that affect the public debt trajectory or compromise the fiscal anchor would motivate a reassessment, even if the spending ceiling in nominal terms is still maintained.' If the government gives in to public pressure (evident in lack of support for Bolsonaro at recent local elections) and increases spending, perhaps evading the cap, credibility could be severely affected, forcing the BCB to hike earlier than expected. Recent court rulings surrounding Maia and Alcolumbre will have also depressed the expectations of meaningful structural reforms taking shape.


Inflation: The headline and core inflation backdrop are no longer as comfortable as they were a few months ago given the surge in food prices and consumer durable goods. Particular attention should be paid to the conditional inflation forecasts for year-end 2021, regarding the 3.75% target, and also for 2022 against the 3.50% target, as this will assist in assessing the potential for the timing of future policy rate hikes.


Markets: Notable move in USDBRL since the last meeting from 5.75 down to 5.10 (Down 12.75%). Given the COPOM's consistent mention of a persistent exchange rate depreciation being one consequence of the transitory price increases, this may aide the anchoring of longer-term expectations.
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