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Scotiabank: Price Pressures To Push BCB To Tighten Rates Further

BRAZIL
  • The Brazilian economy looks stuck in a borderline stagflation environment, with consensus GDP estimated at 0.5% for 2022, and inflation at 7.6%.
  • As a single-mandate inflation targeting central bank, the BCB is prioritizing inflation, hiking rates from 2.0% in March 2021 to 11.75%. Markets are now discounting a terminal rate of 13.75%.
  • Before the start of the Ukraine conflict, and the ensuing spike in commodity prices, Scotiabank called for a terminal SELIC rate of 12.25%, to be reached in Q3-2022.
  • However, the spike in commodity prices is likely to further pressure inflation higher, and risks contaminating the price formation mechanism, which in their view will push the BCB to tighten rates further.
  • Consensus and Scotiabank anticipate that inflation will remain above target over a two-year policy horizon, meaning that policy setting will likely have to remain tight for some time to bring inflation back in check.
  • Accordingly, Scotiabank have raised their forecast of the SELIC rate, resulting in larger hikes in the near-term to a terminal rate of 13.50%, reached in Q2 this year, and easing to 11.00% by Q4’23.
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