Itaú BBA - Inflation expectations recede again in Brazil

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Inflation expectations recede again in Brazil

Março 13, 2018

For 2019, IPCA inflation expectations declined for the second consecutive week to 4.20%, from 4.24%.

Talk of the Day


According to Focus survey, IPCA expectations declined again. For 2018, median inflation forecasts fell to 3.67% from 3.70%; for 2019, expectations declined for the second consecutive week to 4.20%, from 4.24%. The consensus projection for 2020 remained anchored at the 4.00% target. Year-end Selic rate expectations declined 25bps for 2018 (to 6.50%), while it has remained flat for 2019 and 2020 (both at 8.00%). Median GDP growth expectations for 2018 slightly declined to 2.87% (from 2.90%), and did not change for 2019 and 2020 (at 3.00% and 2.50%, respectively). Median forecasts for the exchange rate stood flat at BRL 3.30/USD for 2018 and BRL 3.46/USD for 2020. For 2019, the consensual expectation barely changed to BRL 3.39/USD (from 3.38).

Macro Vision - Central Bank: questions of autonomy and the mandate. Discussions about autonomy at the Brazilian central bank (BCB) are not new, but they gained momentum in recent months, including the debate over the mandate that should be pursued. We analyzed a sample of 31 central banks. Only Brazil and four others in the sample do not ensure formal autonomy to their central banks. In our sample, laws tend to prioritize price stability. Along with analysis of the prevailing legal framework, we modeled the potential impact of the adoption of a dual mandate (inflation and employment) in Brazil. We show that the adoption of a dual mandate would result in higher inflation and de-anchored expectations, without long-term gains in employment. In our view, price stability - and not a dual goal - is the best way for the local central bank to contribute to sustainable economic growth. ** Full Story here.

Day Ahead: January’s Retail Sales will be released at 9:00 AM (SP Time). We forecast a 0.4% increase (month-over-month, seasonally adjusted) on core retail sales (consensus: 0.5%) and a slight decline (-0.1%) on the broad segment (consensus: +0.2%), which includes vehicle sales and construction material. In year over year terms, we forecast a 4.0% increase on core retail sales (consensus: 3.5%), and 6.7% on the broad segment (consensus: 6.6%). The Central Bank announced an FX swap rollover auction of up to 14,000 contracts.


Results from the central bank's monthly analyst survey were little changed from February regarding inflation and the path of monetary policy. One-year inflation expectations stayed at 2.6% (below the 3% target), while the 2-year horizon outlook was anchored at the target. The March monthly inflation gain is expected to be 0.3% (Itaú: 0.3-0.4%). The policy rate is seen stable at 2.5% for at least the next 5 months with one 25-bp hike to 2.75% before yearend. The policy rate is expected at 3% in 1.5 years, and at 3.5% in 2 years’ time (3.25% last month). We see the policy rate stable at 2.5% for the remainder of the year with the normalization process starting next year as the output gap narrows. The major change since last month was to growth with the 2018 forecast raised to 3.5% from 3.2% last month (we have raised our forecast to 3.6% from 3.3%) following the strong start to the year. Growth for next year was increased to 3.7% from 3.5% (Itaú: 3.5%).


Day Ahead: The central bank will release its biweekly monetary policy decision for the reference rate at 5:00 PM (SP Time). In the latest statement, the central bank said that it will act with extreme caution and will wait for disinflation signals before easing the monetary policy rate further. We and the consensus do not expect changes in the next meeting for the 7-day repo rate (27.25%), as inflation expectations are rising and inflation readings are unfavorable.


Day Ahead: The statistics institute (NEGI) will publish January’s industrial production at 11:00 AM (SP Time). We estimate that industrial production grew 0.5% year-over-year (consensus: 0.4%).


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