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JPMorgan Revise Brazil Inflation/Selic Rate Forecasts

BRAZIL
  • JPMorgan have revised their IPCA inflation forecast to 6% from 5.6%, arguing that high indexation in the economy suggests a slower disinflation process with the 2023 IPCA forecast also revised up to 3.5%, 25bp above the BCB’s target.
  • Two straight years of inflation significantly above the ceiling of the target range jeopardize the central bank’s ability to accommodate a new supply shock without risking another leg up in medium-term inflation expectations.
  • With this policy credibility risk in mind, JPM now expect the BCB to prolong the tightening cycle up to 12.75%, with an additional 50bp hike at the June meeting, on the top of the expected 100bp this month and 50bp in May.
  • BCB might choose an even faster pace of policy adjustment, frontloading the tightening, but given the high level of uncertainty and economic conditions, JPM judge they will prefer a more gradual approach for now.
  • The rates movement in addition to the improvement in term of trade should help the BRL in the short term, reducing risks over medium-term inflation and avoiding a much stronger rates adjustment, in their view.
  • JPM also acknowledge that uncertainty over their revised call is extremely high. The policy reaction depends not only on the geopolitical developments and their impacts on the global economy and commodities prices but also on the domestic policy reaction. For example, the government and Congress can opt to buffer the impact of higher commodities prices with tax cuts, reducing short-term inflation but increasing fiscal concerns in the future.
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