We expect the Copom to cut the policy rate by 100 bps at next week’s meeting.
The Brazilian Central Bank’s Monetary Policy Committee (Copom) will meet again next week. Recent data pictures an environment of low inflation and anchored expectations, with mixed signals in activity data, suggesting a gradual albeit increasingly widespread recovery. Copom’s inflation forecasts are expected to drop slightly for 2017 and 2018.
Although in theory the recent political uncertainty shock could have ambiguous effects on inflation, most recent data suggest that the impact has been largely disinflationary so far. Thus, we expect the Copom to cut the policy rate by 100 bps at next week’s meeting, maintaining the easing pace of the previous meeting.
In its statement, we expect the Copom to indicate that the extent of the monetary cycle and the easing pace will depend on inflation forecasts and expectations, the evolution of economic activity data and risk factors associated with the scenario – including non-economic factors.
We revised our forecast for the Selic rate at the end of the cycle to 7.0%, a level that would be reached in the first quarter of 2018. Our scenario contemplates reductions of 75 bps in September 2017, 50 bps in October and December, taking the Selic rate to 7.5% by the end of 2017, and more parsimonious movements at the beginning of next year, with two 25 bps reductions finally taking the Selic rate to 7.0%
1 – Recent data
Inflation data continued to come below expectations, with a widespread decline among components. In particular, services inflation, an item of special interest to the monetary authorities, maintained the recent pace of decline, reflecting the large slack observed in the labor market. In June, the IPCA index posted a monthly deflation for the first time since June 2006. In terms of wholesale prices, indexes again posted a monthly deflation, given the drop in agricultural commodity prices.
Economic activity, on the other hand, has been showing ambiguous signs, suggesting a still gradual but increasingly widespread recovery. Industrial production posted a positive variation in May, above expectations. It is worth noting that this is the second consecutive increase in the monthly variation, a sign that the recovery has become more widespread. However, with higher uncertainty, industry confidence declined in June (a movement only partially reversed in the preliminary results for July), which could negatively affect industrial production ahead. In fact, the first coincident indicators indicate a decline in industrial production in June. In the labor market, there was formal job creation in June, below expectations. However, seasonally adjusted, 13,700 formal jobs were lost, a level still consistent with an increase in the unemployment rate. Finally, activity in the services sector and retail sales stood above expectations in April, but came out lower than expected in May.