Brazil: Anticipating the stimulus from BCB - Rabobank

Mauricio Oreng, Senior Brazil Strategist at Rabobank, notes that the Brazil’s Copom (monetary policy committee) has cut the benchmark Selic rate by 75bps to 13.00% p.a., more than Rabobank and the markets expected.

Key Quotes

“In the communiqué, the BCB’s highlights the evidence consistent with a slower and more gradual activity recovery. Moreover, the BCB celebrates the (surprisingly) low inflation readings of late, with disinflation now spilling over into underlying trends.”

“Incoming data for the last month prompted the BCB to revise down further the inflation projections, still seen at mid-target for simulations assuming rate cuts and weaker BRL.”

“According to the BCB, a scenario of disappointing activity, broader disinflation and anchored expectations warrants the anticipation of the easing cycle. And the statement suggests that the 75-bp pace is also on the plans for the next policy meeting (Feb 22). The extension and speed of the cycle afterwards is more data-dependent.”

“The faster speed of cuts led us to revise our year end Selic projection to 10% (from 11%). Yet we believe today’s move strengthened our long-held (below-consensus) consensus call for single-digit Selic. We now project the “terminal” level of 9% for mid-2018.”

“While the BCB is now trying to lend some help to get Brazil out of recession, by anticipating the stimulus, the actual effect of the rate cuts will largely hinge on the approval of fiscal reforms. Without those, this scenario of structural decline in interest rate is largely at risk.”