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Credit Agricole Expect More Aggressive Easing Cycle Than Prior Forecast

BRAZIL
  • Mid-month inflation in Brazil declined to 3.19% YoY from 3.4% YoY in the prior period. This means that inflation is now below (!) the central bank’s target of 3.25%. While headline YoY inflation is expected to nudge higher towards the end of the year closer to 5%, core inflation will continue to soften. The ongoing evidence of broad-based disinflation will likely nudge BCB towards a more aggressive easing cycle than Credit Agricole had previously expected.
  • Credit Agricole have thus revised their Selic rate expectations lower. CACIB now expect the BCB to cut the Selic rate by 50bp and continue easing at every meeting thereafter to bring the Selic to 11.25% and 8.25% by the end of 2023 and 2024 respectively. They expect that the easing cycle will end at around the 8% level, which would equate to the upper bound of the BCB’s latest estimate of the neutral rate at 4.5-5.0% plus the inflation target of 3%.
  • The cumulative easing cycle will thus add up to 550bp over 16 months, which would be only slightly less aggressive than average judging by the BCB’s history, with the average easing cycle lasting 14 months with over 700bp in cumulative cuts delivered on average (admittedly with significant variability).
  • The BRL has appreciated strongly this year, with performance largely in line with its beta in the context of overall strong Latam FX performance, but also helped by particularly attractive carry and positive surprises on the fiscal side. With the BRL no longer screening cheap (in fact, moderately expensive), the easing cycle starting and likely more scrutiny around the execution of the fiscal rule, CACIB expect the BRL to weaken to USD/BRL 5.25 by the end of this year.
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