Itaú BBA - What we expect for the 1Q17 Inflation Report

Macro Vision

< Volver

What we expect for the 1Q17 Inflation Report

marzo 27, 2017

The IR should corroborate signs of intensification in the monetary easing cycle indicated by recently issued official documents.

The Brazilian Central Bank Monetary Policy Committee (Copom) is scheduled to publish its first Inflation Report (IR) for 2017 this coming Thursday. The IR should corroborate signs of intensification in the monetary easing cycle indicated by recently issued official documents. We anticipate few changes to the Copom’s inflation forecasts relative to those listed in the February minutes. In the baseline scenario, we expect inflation forecasts to be at 3.6% for 2017 and 3.5% for 2018. In the market scenario, which is considerably more relevant in this stage of the cycle, we expect inflation forecasts to be at 4.0% for 2017 and 4.5% for 2018. We believe that the forward looking inflation scenario supports our expectation of a 100-bp cut in the benchmark Selic rate in April. 

The Copom will release its Inflation Report for the first quarter of 2017 this coming Thursday. The following table summarizes our attempt to replicate the Central Bank (BCB) model, based on the baseline scenario (constant exchange rate and Selic benchmark rate) and market scenario (exchange rate and Selic according to the Focus survey).  We use March 17th as the cutoff date, when the exchange rate was at around 3.10 reais per dollar.

In the baseline scenario, we expect to see the inflation forecast for 2017 at 3.6%, somewhat below the estimate provided in the minutes of the last Copom meeting (3.8%). For 2018, we anticipate a slight increase to 3.5%, from 3.3% at the February meeting, in light of the lower interest rates.

In the market scenario, the Focus exchange rate forecasts stand at 3.29 reais per dollar for 2017 and 3.40 reais per dollar for 2018.  For the Selic rate, the Focus survey’s expectations are at 9.0% for 2017 and 8.5% for 2018. For 2017, we expect the inflation projection to decline to 4.0%, from 4.2% at the February meeting; for 2018, we anticipate an inflation forecast of 4.5%, unchanged from the February minutes.

We expect the committee to signal intensification in the monetary easing pace. In recent speeches, Central Bank authorities have affirmed that, as inflation expectations become anchored, monetary policy (along with the progress in the fiscal and microeconomic reforms) may support the recovery in economic activity. In our view, this type of monetary stimulus means pushing the actual benchmark rate below the structural rate – to put it another way, we consider that In the authorities’ view, cyclical factors may allow for a frontloading of the easing cycle without hindering the general declining trend of inflation. Additionally, the advance in fiscal and microeconomic reforms paves the way for a lower structural interest rate, as implied in both our and market expectations (8.25% and 8.5%, respectively, for year-end 2018). Both factors support more intense frontloading of the monetary easing cycle going forward.

We expect the Selic rate to end 2017 and 2018 at 8.25%. We anticipate two 100-bp cuts (in April and May), two 75-bp cuts (in July and September) and one 50-bp cut (in October).

The risks to this forecast are, in our view, the same as those for the inflation path, and seem to be symmetric, for now. On the one hand, the output gap may be more disinflationary than we currently anticipate, especially in a scenario characterized by a positive supply shock which begins to benignly influence expectations. In addition, the international context, marked by the US central bank’s more gradual approach and the resilience of Chinese growth, may lead to additional BRL strengthening. On the other hand, difficulties in approving fiscal reforms may lead to currency depreciation, with potential inflationary implications. It is also worth noting the impact of tax increases, such as PIS / COFINS on fuels, as well as the possible hikes in electricity bills, due to the need to recover public revenues and to make up for the drought in some regions of the country.

< Volver