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- A higher-than-expected IPCA-15 inflation release early this week, the growing possibility of a constitutional amendment to relax rules on the fiscal spending cap and the substantial deterioration in market expectations for both inflation and rates lead SG to flag a high risk of an outsized Selic rate tightening announcement (vs their forecast of 100bp based on the BCB's forward guidance in September) tonight.
- Irrespective of the rate decision tonight, the real challenge for the BCB communication will be to manage inflation and rates expectations.
- Given the sensitivity to market expectations the BCB has shown in the past, the risk of an outsized hike has suddenly gained ground.
- That said, communicating the reasons for an accelerated tightening move (vs the forward guidance in September) and thereafter managing expectations for the inflation outlook and future rate hikes will be a challenge.
- The tightening cycle has already taken the Selic very close to the level the BCB deems as the neutral rate. Hence a much steeper tightening move tonight along with guidance for additional tightening could further stoke inflation and rates uncertainty in the near term. At the same time, following the September guidance, tonight's announcement (=100bp tightening) could result in additional pressure on the BRL along with an associated risk of inflation becoming unanchored in the medium term.