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SocGen Says The BCB Can’t Ignore Changing Global Dynamics

BRAZIL
  • When the BCB’s Copom meets this week, it will face multiple challenges pulling its monetary policy stance in different directions. Year-ahead inflation expectations continue to rise, but the economy and labour market are clearly weakening.
  • Amid high real interest rates, the Lula government wants the central bank to begin easing soon. And while there are no obvious signs of stress yet on Brazilian financial assets arising from the global financial market turmoil, the BCB can’t ignore the changing global dynamics.
  • The market is now pricing in a BCB rate cut within three months (the same as SocGen’s forecast for an easing cycle beginning in June). SocGen expect 125bp of rate cuts this year, followed by 250bp of easing in 2024. SG believe the risks have become tilted to the downside (as far as near-term easing prospects are concerned).
  • Their EM strategy team remains constructive on Brazilian assets, which continue to benefit from high carry to vol and relatively priced in expectations on policy uncertainties.
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