TD Securities On BCB: See Potential For Higher Rates For Longer

TD Securities On BCB: See Potential For Higher Rates For Longer Rather Than A Substantially Higher Peak

• TD expect the BCB to hike the Selic rate by 100bps to 11.75%, representing a tapering in the pace of monetary tightening. With the recent global inflationary impulses, it is possible that the pace of tapering in the rate hike process is not as quick as we expect.
• The BCB faces a still high degree of year-on-year inflation, though an easing in past inflation impulses has suggested that a process of inflation peaking is in place. Regulated prices are now showing a solid disinflation trend, though we are seeing some resistance in non-regulated tradeable goods prices in following the same degree of disinflation. With the new global inflation shocks emanating from the Russian invasion of Ukraine, the BCB may face unexpected upwards pressure on the price complex going forward.
• The solid performance of BRL has helped to keep the lid on imported price inflation, a dynamic which reflects the BCB's effort to return yields back to levels consistent with historical norms.
• Indeed, while inflation expectations have been on the rise, tracking current inflation trends, the real Selic rate has surged in line with the BCB's rate hike cycle, back to historical norms.
• After bouncing back off the 5.00 level, TD see BRL as more fairly valued at current levels, but still favour buying on dips.
• Recent global inflation shocks have helped to incentivize the DI curve to price in a slightly higher peak in rates than just a couple of weeks ago. Pricing is not out of line with reality, though TD see the potential for higher rates for longer rather than a substantially higher peak to the tightening cycle vs. what was priced just two weeks ago.