Itaú BBA - Survey participants expect rate cuts in Brazil later this year

Latam Talking Points

< Back

Survey participants expect rate cuts in Brazil later this year

June 18, 2019

The year-end Selic rate for 2019 declined 75 bps to 5.75%

Talk of the Day


According to the Focus survey published yesterday, the median of the Selic rate expectations for 2019 declined to 5.75%, down 75 bps from its current level, at 6.50%. Following the combination of weak economic activity with below-target inflation and benign inflationary outlook, the median of market expectations now reflects the view that there is room for additional monetary stimulus this year. For 2020, the year-end Selic rate also declined, to 6.50% (from 7.00%), and remained stable for 2021, at 7.50%. Regarding economic activity, for the 16th consecutive week, the median of GDP growth forecasts declined in relation to the previous survey. The forecasts dropped for both 2019 (-7 bps, to 0.93%) and for 2020 (-3 bps, to 2.20%). For 2021, the median of GDP growth forecasts remained stable at 2.50%. On the inflation side, the median of IPCA expectations for 2019 fell 5 bps, to 3.84%. For 2020 and 2021, inflation expectations remained unchanged at 4.00% and 3.75%, respectively. The median of exchange rate stands at BRL 3.80/USD for 2019 and 2020, and BRL 3.85/USD for 2021.


According to the central bank’s monthly analyst survey, core inflation expectations remained broadly stable, while the expected rate hike was delayed once again. The yearend inflation expectation came in at 3.40% (3.38% previously; our forecast: 3.2%), while the 1-year inflation outlook ticked up 4bps to 3.31%. The 2-year inflation expectation was stable at 3.19%. Expectations for core inflation (excluding food prices) are at 3.20% for a 1-year horizon (3.18% in May), while the 2-year vision edged 3bps closer to the 3.0% target at 3.05%. On the monetary policy front, analysts now expect stable rates for the rest of the year, with the expected rate hike postponed from October (2019) to March 2020. Additionally, no other rate movement is seen in the 1-year horizon (previously, a second hike to 4.75% was envisioned). In our view, a widening output gap, controlled inflation and the policy rate near neutral levels would likely lead the central bank to cut rates. We expect the central bank to implement one 25-bp cut, to 4%, before year-end, with 50 bps of further easing, to 3.5%, during 1H20. The vulnerabilities associated with the wide twin deficits (especially the current account deficit) are a major risk for our call for lower interest rates, but our expectation of monetary-policy loosening by the Fed will likely limit the deterioration of financial conditions for EMs, leaving Banrep with a degree of freedom to act.


The monthly GDP proxy posted a null growth in April (from 3.2% in March), close to our forecast (0.1%) and below market expectations (1.0%). The three month moving average in the quarter ended in April decreased to 1.7% (from 2.3% in March). Economic activity in April was dragged mainly by fishing output, while construction sector improved. Non-natural resource sectors, which account for three quarters of the economy, decelerated to 2.4% yoy in April (from 3.6% in March). In turn, natural resource sectors contracted 8.3% yoy in the period (from 1.7% in March). At the margin, monthly GDP momentum remained weak. Using Peru’s statistics institute seasonally adjusted series, the GDP quarter-over-quarter annualized growth rate stood at -0.9% (from -2.5% in March). For 2019, we expect GDP growth of 3.1%, reflecting slower global growth following the intensification of trade wars. Although a growth rebound in 2Q19 is likely, as public investment execution recovers, the deterioration of the global economic outlook will likely weigh on Peru’s small and open economy. ** Full story here.

< Back