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Goldman Sachs: Likely to Deliver Another 150bp and Guide for More

BRAZIL
  • GS expect the Copom to deliver another 150bp Selic rate hike at the Dec 8 meeting, driving the Selic policy rate to an above-neutral 9.25%.
  • Given the deterioration in the current and expected inflation backdrop, they expect the forward guidance to likely indicate a hike of the same magnitude at the Feb 2, 2022 meeting, but the Copom may also elect to keep optionality by simply signalling the intent to drive the policy rate further into restrictive territory but without explicitly signaling the magnitude of the early 2022 move given the unsettled growth and inflation dynamics and uncertain Covid backdrop.
  • In their assessment, a forceful near-term monetary policy response is warranted not only because of the deterioration of the inflation outlook for 2022 and the overall balance of risks around it, but also because of the investment and growth damaging effect of lingering financial volatility amidst high fiscal- and policy-premia.
  • Furthermore, the weakening of the fiscal anchor and other policy and political developments suggest that the neutral real interest rate is likely moving up. This requires a hawkish calibration of short-term monetary policy as well.
  • In all, GS expect the post meeting communique to acknowledge growing signs of inflation dissemination (second-round effects), deterioration of the 2021-2022 inflation expectations, and overall worsening of the outlook for inflation, including core and services. GS also expect the balance of risks for inflation to remain asymmetric to the upside.

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