Itaú BBA - Copom Cockpit: Stable Selic rate in May

Macro Brazil

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Copom Cockpit: Stable Selic rate in May

mayo 3, 2019

The Selic rate will likely be kept at 6.5% p.a. in May´s Copom meeting

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 are expected to increase 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 the March meeting and the first quarter inflation report. For 2020, the Copom's inflation forecasts are expected to remain stable for both the market and reference scenarios.

• In our view, the Copom will keep the Selic rate stable at 6.5% p.a. at the May meeting, given that its inflation forecasts are anchored around the respective targets up to 2021 and the monetary authority seems unwilling to change the level of stimulus until it gains greater clarity about the outlook for economic reforms - especially the pension reform.

• Going forward, we believe that a combination of weak activity and below-target inflation forecasts will pave the way for additional monetary stimuli, if the approval of the pension reform lowers the risk of fiscal deterioration. Once this source of pressure is mitigated – which affects particularly the exchange rate and inflation expectations – we believe that the balance of risks around the Copom's baseline scenario will tilt downward, due to the weak pace of economic recovery. It is reasonable to expect some acceleration of growth as uncertainties about the approval of reforms start to fade, but we see this process as gradual, so that the outlook of a moderate narrowing of the output gap would continue to prevail.

• Importantly, in case of frustration regarding the advance of fiscal measures, we’ll likely see an increase of risk premia, depreciation of the exchange rate and de-anchoring of inflation expectations, even if the output gap remains wide. This situation, which is not our baseline scenario, would be compatible with the maintenance or even increase of interest rates ahead.
 

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



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