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TD Securities on Copom: Selic Rate To 11.50% By May 2022 Meeting

BRAZIL
  • To say that pressure is building on the BCB to deliver an aggressive monetary policy adjustment is likely an understatement. TD expect the BCB to make a more aggressive policy rate adjustment by hiking rates by 150bps, aimed at containing inflation expectations and stabilizing BRL. There is some risk of an even more aggressive move in their view.
  • TD now expect 150bps in hikes at both this meeting and the December meeting, before a tapering in the pace of rate increase. They see the BCB bringing the Selic rate to 11.50% by the May meeting, which should leave the ex-ante real Selic rate near 5%.
  • On FX: The risk to BRL is skewed to the downside. TD believe that a 150bp rate hike, with a commitment of another equivalent hike at the December meeting, will be required to bolster BRL. Anything less risks a resumption of BRL selling.
  • On rates: The rates market has moved aggressively over the past week to price-in a substantially more urgent BCB hiking cycle, including the addition of a cumulative 100bps more in hikes into the year-end. While we see a somewhat less aggressive terminal rate for the BCB currently (at 11.50% by mid-2022), with inflation and inflation expectations still looking out of control, we believe picking a top in rates and looking to receive would be equivalent to catching a falling knife.
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