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JPMorgan: BCB To Maintain A Tough Tone And A Steady Tightening Pace

BRAZIL
  • Expecting 150bp Selic rate hike this week. With inflation surprising to the upside with high dispersion and persistency, rising inflation expectations, and chances of further deterioration of the fiscal outlook, the main risk was for an acceleration in the pace of tightening.
  • However, the recent advance of the constitutional amendment that changes the spending cap and the court-ordered payments tends to reduce fiscal uncertainty for now, at the same time that the recent GDP growth figures disappointed. These two factors are leading expectations to converge on the call for a 150bp hike.
  • The guidance for the next meetings will be equally important. In JPM’s view, the COPOM will signal “another adjustment of the same magnitude” for the February meeting and will continue affirming that it is appropriate to move “even further into the restrictive territory.”
  • JPM calculations suggest that BCB’s inflation forecasts for 2022 will be roughly stable and for 2023 will be slightly lower as it will consider a higher SELIC rate as it is in the Focus survey. But now it seems more uncertain the degree that 3Q GDP release and the new COVID-19 variant will increase the COPOM’s concern about economic growth, which might lead to an earlier-than-expected deceleration of the tightening pace.
  • JPM believe that BCB will maintain a tough tone in its communication and a steady tightening pace to avoid a further rise of inflation expectations, which if continued could dent BCB’s credibility.
  • The statement should again start shifting the description of the global outlook as more challenging, particularly as central banks in developed economies send more hawkish messages. JPM also see the COPOM reinforcing the additional, widespread deterioration of inflation beyond expectations.
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