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Goldman Sachs Believe Forward Guidance May Soften Slightly

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  • Given the recent macro-financial developments and the guidance provided at the Feb 1 meeting, Goldman Sachs expect the Copom to leave the Selic policy rate unchanged at a restrictive 13.75%, and to reiterate a vigilant stance.
  • The forward guidance may soften slightly in recognition of the weakening of the real activity momentum, growing signs of labor market softness, tighter credit conditions triggered by rising nonperforming loans and recent distress in a number of high-profile corporates, and the recent sharp dovish repricing of US and global rates and downside risks to the global economy.
  • However, GS also expect the Copom to express discomfort with the additional deterioration of both short and medium-term inflation expectations since the last meeting (which leads to a higher projected inflation path and increases the cost of disinflation) and the high level and stickiness of core inflation; this will likely limit the scope for early and aggressive easing of the monetary stance, though in GS’ assessment it does not fully eliminate room for a slow start of an easing cycle by 3Q2023.
  • Overall, the case for preserving a restrictive stance and remaining vigilant is justified given still intense services and core inflation pressures, further deterioration of short- and medium-term inflation expectation, lingering uncertainty around the fiscal stance and the ultimate medium-term fiscal rule/anchor that Congress will approve based on a still unknown government proposal, and growing fiscal and quasi-fiscal stimulus.
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  • Given the recent macro-financial developments and the guidance provided at the Feb 1 meeting, Goldman Sachs expect the Copom to leave the Selic policy rate unchanged at a restrictive 13.75%, and to reiterate a vigilant stance.
  • The forward guidance may soften slightly in recognition of the weakening of the real activity momentum, growing signs of labor market softness, tighter credit conditions triggered by rising nonperforming loans and recent distress in a number of high-profile corporates, and the recent sharp dovish repricing of US and global rates and downside risks to the global economy.
  • However, GS also expect the Copom to express discomfort with the additional deterioration of both short and medium-term inflation expectations since the last meeting (which leads to a higher projected inflation path and increases the cost of disinflation) and the high level and stickiness of core inflation; this will likely limit the scope for early and aggressive easing of the monetary stance, though in GS’ assessment it does not fully eliminate room for a slow start of an easing cycle by 3Q2023.
  • Overall, the case for preserving a restrictive stance and remaining vigilant is justified given still intense services and core inflation pressures, further deterioration of short- and medium-term inflation expectation, lingering uncertainty around the fiscal stance and the ultimate medium-term fiscal rule/anchor that Congress will approve based on a still unknown government proposal, and growing fiscal and quasi-fiscal stimulus.