BCB: Heading for faster cuts, if the dust settles abroad - Rabobank

Mauricio Oreng, Senior Brazil Strategist at Rabobank, notes that as widely expected by analysts (us included), and largely priced in by the local yield-curve, the Copom has cut the benchmark Selic rate in 0.25 p.p. to 13.75% p.a. – the second move in this easing cycle.

Key Quotes

“The statement brings a slightly more constructive view on recent inflation developments and projections. Yet the (old and new) points of concern are duly mentioned, meaning no downplaying of risks.”

“On one hand, the authority gave particular emphasis on the current inflation improvement – reducing the fears/risks of a more inertial inflation regime. They also highlighted the weaker-than-expected activity, heralding the possibility of a slower and more gradual GDP recovery and resulting in greater economic slacks for a bit longer.  On other hand, the BCB admits that the favorable (liquidity) window for EMs might be shutting down, which could potentially delay the disinflationary process in Brazil (via a weaker BRL).”

“While the Copom minutes (due next Tuesday, December 6) will probably bring more clarity on the BCB’s mindset and flight plan, it looks like that the BCB is now more inclined to accelerate the pace of rate cuts if the dust settles abroad. Our baseline scenario of a 50-bp Selic cut in January (to 13.25%) has strengthened a bit after today’s Copom statement, yet the decision remains largely data-dependent.”

“We continue to look for Selic rate cuts totaling 275bps across 2017, taking it to 11.00%, as well as additional moves of 200bps across 2018, leaving rate at a (possibly terminal) level of 9.00%.”