Brazil: Holding rate, focusing more on risks than on baseline scenario – Rabobank

Analysts at Rabobank note that the Copom held the Selic (policy) rate steady at 6.50% p.a., surprising the vast majority of analysts (us included), who were looking for another 25-bp cut (to be the last in the cycle).

Key Quotes

“In the statement, the BCB associates the decision with a deterioration in balance of risks following a worse external scenario. The latter made unnecessary an addition of stimulus previously meant to mitigate risks of further delay in the inflation convergence process. For the next meetings, the BCB’s plan is to keep interest rate steady.”

“Clearly, and as opposed to our expectation (also influenced by recent communications), the Copom put less emphasis in the (apparently improving) baseline scenario. With a good level of stimulus already in place, and expected to kick-in with lags (as usual), a cost-benefit analysis likely led the Copom to choose not to run additional risks from an eventually adverse FX transmission. We thought the latter would be dealt with a hawkish statement.”

“Looking ahead, amid a soft activity recovery (with more data confirming our below-consensus call), the most likely scenario continues to be one with low interest rate for quite a long time, in a scenario assuming bold fiscal reforms in 2019.”

“In fact, we maintain our view that the normalization of the policy stance – i.e. hikes towards a neutral level (assumed at 8.0%) – is about to be completed only in 2020, whereas consensus still predicts a full neutralization of the policy stance already in 2019.”

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