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Itaú Says Fiscal Disappointment Could Prompt 100bp+ Rate Hikes This Year

BRAZIL
  • Itaú notes that with a sharp increase in spending and the revenue growth agenda near the limit, the perception of fiscal risk has worsened. To signal the sustainability of the framework's expenditure rule, cost-saving initiatives are vital. These include a spending restriction of at least BRL 20bn, ideally closer to BRL 30bn.
  • Any frustration on this front in the bimonthly Treasury report on July 22 could significantly undermine the credibility of the country’s fiscal framework, which could in turn affect asset prices – perhaps similar to the moves seen in recent weeks. In this case, the USDBRL exchange rate could rise to 5.70, with inflation above 4% in 2024 and 2025, and a need to raise the interest rate by at least 1pp before the end of the year.
  • For now, though, Itaú continues to expect a stable Selic rate of 10.50% until the end of 2025, but with heightened risks related to the potential impact of the recent exchange rate dynamics on future inflation. The balance of risks to their 4.0% inflation forecast also remain to the upside, given the weak FX, tight labour market and rising food prices.
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