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SocGen See Clear Downside Risk To Terminal Selic Rate Forecast Of 14.0%

BRAZIL
  • Things have cooled on inflation front since the June meeting and SocGen expect inflation to fall meaningfully from July onwards. Additionally, year-end consensus inflation expectations have slipped in recent Focus surveys.
  • Still, given the current information on prices, SocGen think the BCB will more likely go for a 50bp hike in August than 25bp.
  • At this stage, there is still the possibility that the BCB keeps its stance for the September meeting open, with some ambiguity in its forward guidance. Nevertheless, SocGen now see clear downside risk to our terminal Selic rate forecast (14.0% in 3Q22), as the BCB could choose to conclude its tightening cycle in August. Also, if inflation expectations for this year moderate further, they would likely bring forward their first rate cut expectation from 1Q23 to 4Q22.
  • The year-end inflation outlook has moderated sharply in the last one and half months since commodity prices have declined and the Congress has passed a bill limiting taxes on some energy goods prices.
  • At the same time, since some of the administered price rises will be implemented in the future and the labour market is tightening, end-2023 inflation expectations have continued to rise.
  • As a result, consensus end-2023 Selic rate forecasts have started to move up (now 11% vs 10.25%). Apparently, despite the growing possibility of the tightening cycle concluding soon, the consensus expectation has shifted in favour of a flatter Selic rate easing cycle in 2023.

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