BCB: Easing apace, with door open for acceleration - Rabobank

Mauricio Oreng, Senior Brazil Strategist at Rabobank, notes that the Brazilian Central Bank (BCB) has cut the benchmark Selic rate by 75bps to 12.25% p.a., in line with market expectations (Rabobank included).

Key Quotes

“In the statement, the Copom (policy committee) discusses the conditioners for the length and speed of future rate cuts, as the official IPCA inflation projections keep pointing to mid-target achievement, in scenarios with Selic rate at 9.5% this year and 9.0% next year.”

“The BCB points to interest-rate convergence to its structural level (based on BCB’s estimates), which could even be lower (than in the past) if fiscal reforms are implemented.”

“Importantly, the Copom also leaves door open for faster moves (i.e. 100bps) conditional on the macro scenario, the evolution of risks and the cycle’s extension.”

“We have recently revised down our Selic rate forecast for end-2017 to 9.5% (from 10.0%). We now mark down our estimate for end-2018 to 8.0% (from 9.0%).”

“In our opinion, that will be the “terminal” level for interest rate in this easing cycle (not necessarily the new neutral level, which will depend on future downward revisions in the inflation target). All of this provided that the government is able to fix the budget via reforms.”