Itaú BBA - Copom: Same Message, Same Pace

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Copom: Same Message, Same Pace

May 22, 2015

We now expect a 50-bp hike in the Selic rate in June, with the hiking cycle ending at a Selic rate of 13.75%.

Copom members have been reinforcing the committee’s intention to bring inflation to the mid-point target by the end of 2016, with “determination and perseverance.” With this in mind, they continue to stress that the Copom “has been, is, and will remain vigilant.” We believe that these are signs that the Copom intends to maintain the current rate-hiking pace at its next meeting. We now expect a 50-bp hike in the Selic rate in June (from 25 bps previously), with the hiking cycle probably ending at a Selic rate of 13.75%.

Inflation remains under pressure this year. The readjustment of relative prices (exchange rate and regulated prices) continues to put pressure on inflation. We raised our IPCA forecast for 2015 to 8.5% from 8.2%. For 2016, we maintained our forecast at 5.5%, above the center of the 4.5% target. The median market forecast for 2016 has recently decreased, but also stands at 5.5%.

The Copom has been signaling that it will “remain vigilant,” aiming to bring inflation to 4.5% by year-end 2016 through “determination and perseverance. In a speech at the BCB’s annual inflation targeting seminar, Central Bank Governor Alexandre Tombini emphasized the bank’s intention to ensure the convergence of inflation toward the 4.5% target by the end of 2016, through “determination and perseverance." Tombini repeated that "monetary policy efforts still have not proven sufficient,” adding that the Copom "has been, is, and will remain vigilant." Deputy Governor Luiz Awazu Pereira used the same wording at a recent BCB event. In our view, these are signs that the Copom intends to maintain the current rate-hiking pace at its June meeting.

We now expect a 50-bp hike at the Copom’s June meeting (from 25 bps previously). In light of the Copom’s recent communication and the pressure on current inflation, we expect the rate-hiking pace to continue. Looking forward, we believe that economic activity will continue to lose strength due to a weak the labor market and low business and consumer confidence. Thus, we believe that the Copom will probably end the hiking cycle after the June hike, at a Selic rate of 13.75%.


 

Ilan Goldfajn
Chief Economist

Caio  Megale
Economist

 



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