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TD Forecast Transition To 50bp Hikes Following August Meeting

BRAZIL

TD on June BCB Meeting:

  • BCB will continue to raise rates at a rapid clip in order to contain the impact of the current inflation surge, and the risk of second round effects.
  • With the base-effect driven peak not yet evident, real ex-post rates remain negative, though 150bps of hikes across two Copom decisions have helped to reverse the trend.
  • A forecast 5 percentage point improvement in the real rate should bring it back to around 4.25% by late December. While impressive, particularly compared to where real rates began the year, it will still remain around 50bps below the longer term (pre-Covid) average.
  • Nevertheless, this informs their view that the BCB will be in a position to transition to 50bp hikes following the August meeting, and move to 25bp hikes in the new year.
  • They believe this action will satisfy "partial normalization", as conceived by the BCB. However, there is currently momentum in Copom's hawkish bias that could do away with the wording, which they would interpret as a suggestion that the BCB will move more aggressively than TD currently forecast.
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