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JPMorgan on BCB: Continue To Expect Additional Tightening in June

BRAZIL
  • BCB’s communication last week leaned more dovish than expected. The guidance was again explicit that it believes the hiking cycle should stop after a well-telegraphed 100bp hike at the next meeting. This came as a more direct signal compared to the minutes which left the door open for even tighter policy at subsequent meetings.
  • Despite those signals, JPMorgan expect the main “if”—that inflation will be higher for longer than BCB expects—to actually materialize. Last week JPM revised up their inflation forecasts, and now look for a 7.1% Dec/Dec rise this year (from 6.5%) and 4% next year (from 3.5%).
  • Given the intense inflationary pressures globally, a prolonged period of domestic inflation running well above the central bank’s target range, and lingering policy uncertainty, JPM believe that additional inflation surprises in the short term could contaminate medium-term inflation expectations significantly, in particular if market participants doubt the monetary authority will respond to contain the second-round impact of those shocks.
  • Thus, JPM continue to expect the COPOM will eventually find itself stuck in a position that necessitates a final 50bp tightening in June following the 100bp hike in May.
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