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Scotiabank Expecting 50BP Cut, Guidance Equally Relevant For Markets

BRAZIL
  • Inflation (and expectations) has continued to trend in the direction sought by Campos Neto and the rest of the Copom. From the cycle peak of 12.2% in May 2022, headline IPCA-15 inflation has dropped to 3.2% as of July, in data released on the 25th. The latest consumer prices release also show a solid deceleration in services and manufactured goods inflation that show broader-based inflation declines in core categories that had troubled the BCB, delaying the beginning of adjustments.
  • With the 50bps cut that Scotiabank expect this week, the BCB’s real rate would still be at a very restrictive level of around 10%. It’s become safer to assume that another half-point or greater reduction may come at the BCB’s meetings in September, November and December.
  • Markets are currently positioned for a year-end policy rate of 11.50%, or 175bps cuts spread out over the three remaining meetings of 2023 following the initial cut.
  • Respondents to the BCB’s weekly survey are more conservative in their expectations, clustered around a 12% target. The size of next week’s cut will certainly be important, but the BCB’s statement and loose guidance around the pace of cuts in coming months will be equally—If not more—relevant for markets.
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