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Credit Suisse on Copom: Expect Last 50BP Hike In August, To 13.75%

BRAZIL
  • Credit Suisse expect that the Copom will increase the Selic rate by 50bps to 13.25%, in-line with the previous meeting’s comment that “the Committee foresees as likely an extension of the cycle, with an adjustment of lower magnitude.”
  • As per the previous meeting, we had highlighted that the outlook for inflation had worsened, there was a high probability that the central bank would need to revise its inflation forecasts of 7.3% for 2022 and 3.4% for 2023, and that, as a result, the tightening cycle would likely need to continue in August. CS maintain these projections, given inflation expectations have since continued to rise.
  • Domestically, the outlook for inflation is even more challenging. Economic activity surprised to the upside, with a sharp deceleration in the unemployment rate and more robust growth in domestic demand.
  • Additionally, inflation picked up even more than previously expected. Since the previous meeting, Focus readout expectations have increased from 7.9% to 8.9% in 2022 and 4.1% to 4.4% in 2023.
  • Overall, monetary policy is forward looking, and the potential decline in the level of current inflation due to tax cuts should matter only for their potential impact on future inflation. The government’s measures to reduce inflation this year should be seen as a risk for the path of future interest rates, given that inflation expectations for 2023 and 2024, calendar years that will be in the monetary policy horizon at the next meetings, will probably increase, as part of the tax cuts are expected to be reversed next year, and the risks for public accounts have also increased.
  • In terms of guidance for the August meeting, CS believe that the central bank will leave open the possibility for another final hike. They expect that the monetary authority will hike rates one last time by 50bps in August, to 13.75%.
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