BCB Preview: Baby steps, for now - Rabobank

Mauricio Oreng, Senior Brazil Strategist at Rabobank, suggests that based on latest communications by the Brazilian Central Bank (BCB) and recent evolution in some risk factors for inflation (e.g. volatile external market conditions, persistent services costs), Rabobank is  projecting a Selic rate a cut of 25bps  to 13.75% (we previously had -50bps) for this Copom policy meeting (November 29-30).

Key Quotes

“Thus, we align ourselves with a wide consensus of analysts and the yield-curve pricing.”

“One must not dismiss some bright spots in the inflation scenario, though. For instance, recent declines in foods costs (paying back to upward shocks of previous months) will help drive full-2016 inflation much closer to the upper target (6.5%) than previously thought. While led by volatile items, this softening sets a better starting point for 2017. More importantly, downside surprises in activity herald a yet more intense and lasting idleness in the economy, raising further the odds for a continued disinflation ahead.”

“Not only we continue to project faster rate cuts at some point ahead (we will look for signs in the statement and minutes), but we also keep seeing future structural changes in the economy paving the way for deep structural (i.e. permanent) cuts in coming months, years. Of course, all of this holds if Brazil does its fiscal policy homework correctly (our baseline scenario).”