Itaú BBA - Activity in Brazil still consistent with Copom´s base case

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Activity in Brazil still consistent with Copom´s base case

February 13, 2019

The minutes reinforce the case for stable Selic rate at the 6,5% in coming meetings

Talk of the Day


The Copom minutes showed that the committee has apparently discussed more extensively the economic activity outlook, and concluded that, when taking into account shocks that took place in 2018, recent developments are consistent with its base case scenario, of a gradual economic recovery. The committee also emphasized that the pace of economic recovery will depend crucially on a reduction of uncertainties regarding reforms, especially those of fiscal nature. Risks are still perceived as being asymmetric to the inflationary side, but have abated, especially due to the external outlook, which now contemplates a possible intensification of the global slowdown. The text also stressed the need for a cautious approach to monetary policy. In sum, the minutes reinforce the case for stable Selic rate at the 6,5% in coming meetings, barring any significant shocks, as well as the impact that reforms may have on monetary policy decisions down the road.  The next event to monitor, on the policy communication front, is the tone and content of incoming governor Roberto Campos’ confirmation speech.

Day ahead: December’s retail sales will be released at 9:00 AM (SP Time). We forecast a 0.3% mom/sa decrease for core retail sales and a 0.1% drop in the broad segment (which includes vehicle sales and construction material).


According the results of the central bank’s analyst survey, a more gradual monetary normalization cycle is expected following weaker-then-expected growth at the close of 2018, and surprisingly low inflation readings when utilizing the new consumer basket. The policy rate forecast for yearend 2019 was lowered to 3.25% (from 3.5% in the previous survey), so only one additional rate hike this year. For the next 12 months, policy rate forecast stood unchanged, at 3.5%, but fell to 3.5% (from 3.75% for the 18-month horizon and to 3.75% (from 4%) for the next two years. Inflation forecasts were revised only mildly for this year, to 2.7% (from 2.8%), while unchanged at 3% for 2020 (also the 24-month expectation). Hence, the market likely sees the low annual inflation print released last week as a transitory occurrence. Growth forecasts ticked down 0.1pp to 3.5% for this year (Itaú: 3.2%). Overall, we are still analyzing what implications the new CPI basked will have on inflation dynamics going forward, but believe that given the uncertainty in the short-term and weaker activity momentum at the beginning of the year, there is motivation for a cautious central bank. We see space for two rate hikes (to 3.50%) by yearend, with stable rates in 1H19, and hikes happening only in the second half of the year.

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