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JPMorgan: Above Consensus Call For 25BP Hike To 14.00%

BRAZIL
  • JPMorgan believe that the COPOM will hike the SELIC rate by 25bp next week, an out-of-consensus and close call that the markets at this point price in about 40% chances of happening.
  • Signs point to a hot economy. Not only economic activity is surprising analysts and policymakers to the upside – this week’s July economic activity index accelerated – but also capacity utilization is on the rise and the labor market is tight by any metric.
  • While headline inflation is quickly falling, particularly due to tax cuts, the most recent August core CPI accelerated. If that were not enough, although inflation expectations are falling for this year and the next, Focus survey for 2024 is moving up and the market breakevens continue well above BCB’s targets, suggesting disbelief that monetary policy will decisively act to meet its goals in the foreseeable future.
  • This environment leads JPM to think that BCB would prefer to run the risk of tightening too much at the expense of growth rather than tighten too little and risk jeopardizing policy credibility at this moment. As some COPOM members reinforced in recent communications, it is too soon to declare victory over inflation.
  • In terms of communication post-decision, we expect the COPOM to signal that, after next week’s hike, it will most likely pause and observe incoming data.
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