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Deutsche Expect Higher Inflation And High Rates For Longer

BRAZIL
  • Despite being significantly more sceptical than consensus on policies, Deutsche expected market pressure to force the incoming administration to signal a minimally credible fiscal framework rather than policies that have proven to have failed during the Dilma administration. The benign global backdrop into 2023 has bought this administration time.
  • Although DB maintain the view that there is no politically acceptable alternative to eventually presenting an acceptable fiscal anchor, this will take longer than we expected absent a cohesive and viable plan, and amid a global markets rally. If anything, the only consistent message so far has been that the government wants to collect more and to spend even more, which seems very unlikely without another China and global growth boom (and thus another commodity super-cycle). These are unlikely.
  • The policy backdrop remains fluid, but it now seems unlikely the CB will cut before Q4. Restoring taxes on fuel has been difficult, but DB expect this to happen late in Q1. However, more important than these supply shocks, the main risk to inflation is that an unsustainable macro backdrop feeds into rising inflation expectations, and overall inflation becomes entrenched.
  • Despite BRL strength and falling headline inflation, both breakeven and expected inflation are rising again. DB expect Selic and inflation to end the year at 12.50% and 5.90%.
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