BCB: End to easing? - TDS

The BCB cut its policy rate by 25bps yesterday, bringing the Selic to a new low of 6.75% as Brazilian policy makers have signaled that this is the end of the easing cycle, but a dovish bias remains, should unforeseen shocks emerge and negatively impact the inflation trajectory, notes Sacha Tihanyi, Senior Emerging Markets Strategist at TDS.

Key Quotes

“As was widely expected, the BCB cut by 25bps to bring the Selic rate to 6.75%. The central bank also took the opportunity to signal an end to the easing cycle by stating that "at this time the Copom views the interruption of the monetary easing process as more appropriate." The central bank also expressed a dovish bias by leaving the door open to future cuts should their baseline scenario or risks to this scenario change significantly.”

“The inflation outlook remain benign with expectations across 2019 and 2020 at 4.25% and 4% respectively, essentially on target. Inflation projections suggest convergence back to just below target by the end of 2018 at 4.2%, where it is projected to hold through 2019. The balance of risk on inflation also remains consistent with the previous statement. Copom acknowledged that the economic situation continues to suggests an accommodative monetary policy setting, and consider 6.75% to be below the (unspecified) structural level.”

“We believe that the BCB will remain on hold for the duration of 2018, considering the stability of the inflation scenario and the benign external environment. The market is pricing-in the beginning of a monetary tightening cycle by September of this year, but we view this as a bit too preemptive given the still dovish bias of Copom, and the stability of the (within target) inflation forecasts in recent months.”

“We think that the market has chosen late summer or early fall as the point at which the hiking cycle will begin likely due to the historical precedent of the duration of pause following the end of past easing cycles. For instance, the past two easing cycles were paused for approximately 4 and 6 months respectively, before hiking began. This empirical fact does not necessarily inform the current Copom thinking, and is applied in a purely naive sense, ignoring the significant depth and substantial duration of the recession that Brazil has endured.”

“In the meantime, we view BRL as a range trade, trading on little else than USD beta or broad EM risk sentiment. In this way we view selling USDBRL at the 3.30 level and above as tactically advisable. The next big foreseeable macro risk event will be the October election, which will bring guidance on the still key fiscal policy issues that face Brazil.”