Brazil: What to expect ahead? – Rabobank

Mauricio Oreng, Senior Brazil Strategist at Rabobank, continues to take the Copom guidance and stick to their view that the BCB will probably cut the Selic rate to 6.75% (-25bps) on February 07.

Key Quotes

“We see this move as the end of the cycle, given the BCB wording about ‘caution’ and the inflation simulations pointing to numbers much closer to the mid target for a medium-term horizon.”

“Our macroeconomic scenario takes for granted the approval of key fiscal reforms no later than 2019-2020, paving the way for a moderate recovery ahead. We project GDP growth of 2-3% for the coming years, which will erode slacks very slowly. The reason for this gradualist path is that if we do see reforms favouring investment in one hand, we also do see a fiscal drag creating a bit of (a temporary) headwind in the other.” 

“We look for inflation to settle at 4.0% for the medium run, with inflation expectations solidifying further around thee targets as fiscal risks dissipate.  We continue to look for a normalization (or neutralization) of the monetary policy stance only in 2020, with Selic rate likely reaching back up towards 8% within a time span of about two to three years.”