Brazil: central bank minutes reinforced May rate cut expectations - Rabobank

The Central Bank of Brazil published the minutes from last week meeting. According to analysts from Rabobank, the message was pretty in line with the statement, reinforcing expectations for another cut in the key interest rate (Selic rate) in May and a pause in June.

Key Quotes: 

“The (surprising) decision to signal a cut in May follows: 1) a will to mitigate risks of delayed convergence to the targeted path, amid continued weakness in core/underlying inflation numbers (as signalled in the statement); 2) significant decline in inflation projections (especially for 2018), using an updated information set, including Selic rate at 6.50%.”

“According to BCB officials, in June the Copom’s policy horizon will mostly focus on calendar-2019. Given the baseline scenario, balance of risks, policy lags and uncertainties inherent to policy transmission, the committee sees as appropriate an interruption of the easing cycle (to evaluate the subsequent steps afterwards).”

“As mentioned in the minutes released today, in mid-2018 the BCB will put more focus on the outlook for 2019, for which downside risks for inflation projections can also be offset by lower expectations for the speed of normalization (given that the BCB’s 4.1% IPCA estimate for next year assumes Selic rate back up to 8%). We keep looking for Selic rate at 6.25% for both end-2018 and end-2019, and maintain our opinion that the consensus expectation of 8% Selic rate for end-2019 is overblown.”

“The 20% chance we subjectively perceive for a 6.0% terminal Selic in this cycle follows our below-consensus activity for 2018 (we project 2.2% GDP, with consensus at 2.9%) and the possibility of persistently low core inflation, given anchored expectations, wide slacks, favourable inertia.”