MNI BCB Preview – Dec 2024: Tightening Pace Acceleration
Executive Summary
- The Copom is set to step up the hiking pace again in December after the government’s recent fiscal package disappointed market expectations, leading to a weaker currency and a new spike of inflation expectations, which is likely to bring renewed inflationary pressures.
- Analysts anticipate a 75bp hike to 12.00%, with risk of an even larger 100bp move if BRL remains under pressure ahead of the meeting and the central bank wishes to front-load the adjustment.
- Guidance will be closely monitored as analysts continue to increase their peak Selic rate forecasts for the cycle.
Click to view the full preview: MNI BCB Preview - December 2024.pdf
Attention ahead of the December Copom meeting has been focused on the government’s recently announced spending cut package and the subsequent adverse market reaction which has seen the Brazilian real fall by over 4% against the dollar and DI swap rates spike higher across the curve. The move happened after President Lula added a tax exemption for low-income workers to the fiscal package at the last minute, adding to concerns that the government lacks the willingness to implement the structural reforms needed to contain the fiscal deficit and stabilise debt dynamics.
Lula requested studies to ensure that by the end of 2026 an income tax exemption will be applied to individual earnings up to 5,000 reais ($880) a month, an increase from the current limit of BRL 2,259.20. Finance Minister Haddad emphasised that the measure would have no fiscal impact because the income tax rate will increase for those earning more than BRL 50,000 per month. However, markets are sceptical that this will be the case. The surprise announcement came at the same time that the government finally unveiled BRL 70 billion of spending cuts over the next two years in an effort to reinforce its commitment to the country’s fiscal sustainability.