Brazil: Selic rate heading for (a historical low of) 7% - Rabobank

Mauricio Oreng, Senior Brazil Strategist at Rabobank, notes that the Copom has cut the benchmark Selic rate by 75bps to 7.50% p.a., as widely expected.

Key Quotes

“In the forward guidance, the BCB continued to hint at a “moderate reduction of the pace of easing” (read a 50-bp cut) for the next meeting (December 5-6).”

“Assuming Selic rate at 7.0% this year and next, the BCB’s inflation simulations point to IPCA headed to mid-target (4.25%) for 2019. That is a policy horizon increasingly relevant, as the BCB seems to recognize in the statement.”

“Despite some degrees of freedom left in the statement (for eventual changes in scenario), we believe that the BCB’s flight plan today is to end the cycle at 7.00% (a new historical low).”

“Hikes? Given the huge slacks in the economy, we only see the BCB neutralizing an expansionary policy stance in 2020, and with moderate hikes of 100bps. Naturally, our scenario assumes the approval of major fiscal reforms no later than that.”