Brazil: Central bank tone increases risks of a slower easing cycle - TDS

The Brazil Central Bank released the minutes from their latest meeting and the first under the new authorities. Analysts from TDS continue to have a baseline scenario with an easing cycle starting in October, despite the fact that the BCB want to see more advances in the fight against inflation.

Key Quotes:

“The BCB has just published the minutes of last week’s policy meeting. This was the first of such publication by the new board (led by Ilan Goldfajn), bringing a new format characterized by its concision and clarity.”

“The Copom minutes basically reinforced the signals previously conveyed in the (very thorough) statement out last Wednesday. Broadly speaking, while the Committee does see progress in the fight against inflation, they want more (and maybe faster) improvements before considering rate cuts.”

“Our interpretation is that the BCB wants to be certain (or very confident) that future policy moves will be consistent with IPCA inflation running at the center target (or below it) for 2017 onwards.”

“All in all, today’s Copom minutes gives a bit more clarity on the BCB mindset, with the Committee still needing further improvements on the scenario (especially in fiscal policy and inflation expectations) before getting enough confidence to embark on an easing cycle. The authority wants to make sure that the policy steps will be consistent with the achievement of mid-target inflation for both 2017 and 2018.”

“Given the risk that the debate of fiscal measures in Congress take a bit longer than we expect, which would potentially limit the downside for (or delay further drops in) inflation expectations for 2017, we do see greater odds that the upcoming easing cycle will either move at a slower speed or even take longer to begin. Our baseline scenario still has cuts starting in October, at a speed of 50bps per meeting (taking the Selic down from 14.25% to 13.25% by December). But the tough tone of the BCB communications is increasing chances for later and slower rate cuts (as compared to what we have penciled in).”