Brazil: Policy rate heading to 7.5% (or lower) - Rabobank

The Copom has cut the benchmark Selic rate by 100bps to 9.25% p.a., as widely expected and in the statement, the BCB (Brazilian Central Bank) justifies the move claiming that the higher uncertainties about structural reforms have had neutral inflationary effects so far, as economic conditions have remained broadly unchanged, notes Mauricio Oreng, Senior Brazil Strategist at Rabobank.

Key Quotes

“The BCB is forecasting IPCA inflation at 4.3% for 2018 (the most relevant policy horizon as of now), for a scenario assuming Selic rate at 8.0% for the end-2017. The 0.2 p.p. leeway from mid-target could be suggesting a slight additional downside for the Selic rate.”

“We are increasingly worried about fiscal developments from a medium/long term perspective (i.e. with lesser conviction about the odds for approval of an effective pension reform in a reasonable time frame). Yet our baseline scenario still counts on minimal advances this year (e.g. approval only of a minimum age of retirement), helping Brazil cross the bridge until 2019. Thus, despite the (considerable) risks to our baseline, macro conditions will likely remain afloat in coming months, paving the way for more aggressive Selic rate cuts.”

“We are now revising our call for the next Copom meeting to a cut of 100bps (to 8.25%) and foresee two additional moves (of 50bps and 25bps), taking Selic to 7.5% in December. While our estimate for the end of cycle is unchanged, we see odds skewed to the downside. That means the historical low of the Selic (7.25% in 2013), is under great “threat” (with chances that a good deal of cuts in this cycle will be permanent, if the key fiscal reforms pass).”