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JPMorgan Now Forecast A Final 25BP Hike In September

BRAZIL
  • JPMorgan expect the COPOM to hike the SELIC rate by 50bp next week, in line with consensus, current market pricing, and the BCB’s message following the last meeting.
  • They think the BCB will leave the door open for further tightening in September, and now forecast a final 25bp hike in the September meeting given the economic outlook of solid GDP growth thus far, rising inflation expectations, and additional fiscal stimulus. Maintenance of the higher for longer message, which has been present in both written statements and public speeches of BCB’s governors, is also expected.
  • JPM’s call that next week’s expected 50bp hike would mark the last adjustment in this cycle has always been dependent of clear signs that activity was already weakening and they recognize that up to now those signs are not present. Quite to the contrary and much to their surprise most confidence indicators and labor market data continue improving.
  • Also, the additional fiscal impulse granted by Congress earlier this month adds uncertainty to the timing of the deceleration. As JPM said earlier this month, while they remain convinced that the Brazilian economy is set to sharply decelerate, they are less convinced of timing of this weakening (If it didn’t happen yet, it doesn’t mean it won’t). And timing matters, particularly for a central bank in search to regain credibility and control medium term inflation expectations that continue to be stubbornly on the rise, in tandem with high core inflation and fiscal de-anchoring.
  • It is hard to rule out a more hawkish outcome with BCB tightening in Q4 as political and fiscal risks may continue to worsen the balance of risks for inflation forecasts. At the same time, a more pronounced global and local economic growth deceleration – if accompanied by at least some accommodation in inflation expectations – can lead BCB to halt the cycle sooner, but for now we believe the probability of this risk is lower than the previous one.

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