Itaú BBA - Copom Cockpit: Stable Selic rate in June

Macro Brazil

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Copom Cockpit: Stable Selic rate in June

June 14, 2019

Conditional on the pension reform approval, we now expect a decline in the Selic benchmark interest rate to 5.0% in 2019 and 2020.

For the version with all charts and tables, please open the attached pdf file
 

• The Brazilian Central Bank's Monetary Policy Committee (Copom) meets again next week. Copom's inflation forecasts for 2019 will likely decrease both in the market scenario (which includes the exchange and interest rates forecasts reported in the Focus survey), and in the reference scenario (which assumes constant exchange and interest rates), compared to May’s meeting. For 2020, forecasts will also likely recede in both the market and reference scenarios.

• We believe that the Copom will maintain the Selic rate stable at 6.5% per year at the June meeting, given the monetary authority's unwillingness to change the level of stimulus until there is greater clarity about the prospects for economic reforms - particularly the pension reform. We believe that the Copom will only cut the Selic rate after the approval of the reform in the first round of voting in the Lower House, which we now expect to take place in July.

• Going forward, we believe that the combination of weak economic activity with below-target inflation and benign inflationary outlook will open up room for additional monetary stimulus, which will take the Selic rate to 5.0% in 2019, with the monetary rate unchanged at this level in 2020.

• Importantly, a scenario of frustration with the progress of fiscal measures may be compatible with the maintenance or even increase of interest rates ahead. Although this is not our baseline scenario, such frustration could lead to an increase in the risk premium, exchange rate depreciation and de-anchoring of inflation expectations, even if the output gap remains wide.
 

For the version with all charts and tables, please open the attached pdf file



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