MNI China Daily Summary: Wednesday, January 22

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BRAZIL: JP Morgan Still Sees 100bp Selic Hike Next Week, 15.25% Terminal Rate

BRAZIL
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  • JP Morgan expects the Copom to unanimously hike the policy rate by 100bp next week, in line with the forward guidance. Governor Galípolo and Deputy Governor Guillen have both acknowledged the challenging inflation outlook but suggested that the threshold for breaking that guidance is high. JPM expects the statement to continue to guide for another 100bp hike in March, with sufficiently hawkish wording to keep the door open to further hikes in Q2. JPM still sees a 100bp March hike to be followed by two 50bp moves to 15.25%.
    • JPM recently raised their 2025 CPI projection to 5.5%, amid above-potential growth, a food price shock, FX pass-through and indexation effects. They expect the BCB to forecast inflation well above the 3% target at least until Q3 2026. Further sharp FX depreciation and resulting CPI pressures also cannot be dismissed amid external policy and domestic fiscal challenges.
    • Despite some signs of deceleration in Q4, activity remains resilient and the labour market tight. JPM sees risks tilted towards the need for more aggressive hikes than currently projected.
    • However, a 15.25% Selic rate would already be the highest in almost 20 years, resulting in an ex-post real rate around 10%, which is likely quite restrictive. JPM expects that this, as well as weaker H2 growth, will prevent the terminal rate from being even higher.
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  • JP Morgan expects the Copom to unanimously hike the policy rate by 100bp next week, in line with the forward guidance. Governor Galípolo and Deputy Governor Guillen have both acknowledged the challenging inflation outlook but suggested that the threshold for breaking that guidance is high. JPM expects the statement to continue to guide for another 100bp hike in March, with sufficiently hawkish wording to keep the door open to further hikes in Q2. JPM still sees a 100bp March hike to be followed by two 50bp moves to 15.25%.
    • JPM recently raised their 2025 CPI projection to 5.5%, amid above-potential growth, a food price shock, FX pass-through and indexation effects. They expect the BCB to forecast inflation well above the 3% target at least until Q3 2026. Further sharp FX depreciation and resulting CPI pressures also cannot be dismissed amid external policy and domestic fiscal challenges.
    • Despite some signs of deceleration in Q4, activity remains resilient and the labour market tight. JPM sees risks tilted towards the need for more aggressive hikes than currently projected.
    • However, a 15.25% Selic rate would already be the highest in almost 20 years, resulting in an ex-post real rate around 10%, which is likely quite restrictive. JPM expects that this, as well as weaker H2 growth, will prevent the terminal rate from being even higher.