Brazil: Central bank expected to hike key rate by 100bps in August

According to analysts from Rabobank, recent inflation data from Brazil, will force the central bank to raise interest rate toward the 7.00% by year-end. They expect a 100bps hike in August.

Key Quotes:

“Externally, the data flow was mixed ahead of the FOMC’s decision, with c. 87% of the S&P500 firms reporting better-than-thought season results but labour/housing/PMI services missing expectations amid Delta fears. Domestically, although Covid still leaves fiscal risks alive and the dry season made the government set off alarm bells, July’s mid-monthly CPI stronger report make us now see a the Copom hiking until 7.00% by yearend. As a result, the USD/BRL already started the week off on a high of 5.1528 @09:00am on 19 July due to the global Delta fears, and after posting a low of 5.2938 @10:26am on 20 July, it closed the week at 5.2000, with a depreciation of 1.7% from the previous week, leading the BRL to a YTD flat performance, being surpassed only by the TWD, RUB, and CNY in the EMFX sphere. Over the week, the DXY dollar index rose 0.2% (to 92.9) and the CRY commodities index rose by 1.9% (to 217), but Brazil’s 5yr CDS spread dropped by 2bps (to 173bps) in the week. “

“Consumer inflation slows by less than expected in July with the breakdown suggesting more pressure ahead. IPCA15 mid-monthly inflation came in at 0.72% m/m and 8.6% y/y (from 8.1% y/y), further above BCB´s 2021 upper-limit (5.25%; midpoint: 3.75%). Diffusion indexes and underlying gauges still point to persistent inflation pressures ahead: we now project the IPCA ending 2021 at 6.5% (from 6.3%), with the main upward risks remaining the atypically dry season, which may keep pressuring electricity costs. The inflation outlook made us think that the BCB will hike the Selic rate until 7.00% (from 6.50% before) by yearend.”

“We now think the BCB will hike 100bps in the August meeting, 75bps in the September meeting, and two more hikes of 50bps in the October and December meetings (instead of three more hikes of 75bps). Then, in 2022, the BCB will stay put.”

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